Aluminium price rally unsustainable as China’s production likely to increase significantly

Since mid-January, aluminium prices have grown 7.8 per cent. Even though the recent recovery in prices of metals is largely a technically driven move and not in line with demand fundamentals, a part of the aluminium price performance is more fundamentally driven as the markets have gone through a more significant supply response.

There was a similar supply-driven rebound in aluminium price in the Q3 2014. The price had rallied from $1,756/t at the end of May to $2,115 by September, gain of 20 per cent, boosting by capacity closures in the world ex-China. Nevertheless, this rally sputtered by the end of 2014 as the market was saturated with aluminium again due to inventory profit taking and capacity restarts.

As it happened in 2014, the current rally’s sustainability is dependent on producer discipline, but in China this time. As witnessed repeatedly in the past, producer discipline in a nonconsolidated market is pernickety and usually is short lived.

While China’s aluminium smelters reduced almost 15 per cent of their existing capacity in 2015, China’s production is likely to increase significantly beginning from March as new projects in Shandong increase. Eventually, this along with the threat of restarts should cap the domestic SHFE price. Furthermore, increased Chinese production along with weak domestic demand will lead to increased exports, weighing on the LME price too.