Aluminium prices unlikely to return to past lows, says Axis Securities

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Aluminium prices may have eased from their recent peak, but they are unlikely to return to the lower levels seen in earlier years, according to Axis Securities, which expects the market to remain supported by tight supply, rising production costs and steady demand growth.

The metal had climbed to nearly USD 3,800 per tonne before retreating to around USD 3,500 per tonne. Aditya Welekar, Senior Research Analyst for Metals at Axis Securities, said the correction followed stronger-than-expected economic data from the United States, which strengthened expectations that the US Federal Reserve could maintain a tighter monetary stance. Higher interest rates typically weigh on commodity prices by supporting the US dollar.

Even after the recent decline, Welekar believes the underlying fundamentals for aluminium remain favourable.

On the supply side, China continues to limit additions to its aluminium smelting capacity, reducing the scope for a significant increase in global output. At the same time, disruptions in the Middle East, a region that accounts for about 9 per cent of worldwide aluminium supply, have added to concerns over availability.

Axis Securities expects the global aluminium market to remain in deficit this year, estimating that demand could exceed supply by 1.2 million to 2 million tonnes.

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While new smelting projects are under development, particularly in Indonesia, Welekar said aluminium is not a market where capacity can be ramped up quickly. New plants require substantial investment, reliable power supplies and supporting infrastructure, making expansion a gradual process rather than a rapid one.

The cost of production is also providing a floor to prices. Aluminium manufacturing is highly energy intensive, and elevated electricity and natural gas prices continue to push up operating costs. In addition, environmental policies, including carbon-related regulations in major consuming regions, are increasing the cost burden for producers.

Against this backdrop, Axis Securities expects aluminium prices to remain above historical averages, with Welekar indicating that the metal could hold within the USD 2,800-3,000 per tonne range over the medium to long term.

The brokerage, however, remains cautious about the near-term outlook for metal stocks. Investors are closely watching upcoming inflation data, signals from the US Federal Reserve and the seasonally weaker demand environment during the monsoon quarter, all of which could contribute to market volatility.

For investors with a longer investment horizon, Welekar continues to favour the sector's larger aluminium producers. He said Hindalco Industries, National Aluminium Company (Nalco) and Vedanta remain attractive "buy-on-dips" opportunities, as the long-term outlook for aluminium demand and pricing remains supportive despite short-term fluctuations.

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