Aluminium scrap supply surge could cool LME rally to $2,400–2,700/t, says InCred

The London Metal Exchange (LME) aluminium prices were widely expected to remain in the range of USD 3,200 to USD 3,300 per tonne. However, Managing Director and Head of Research of InCred Research Services, Satish Kumar, has taken a more cautious stance. He believes aluminium could retreat to USD 2,400–2,700 per tonne, driven by a steady increase in aluminium scrap supply.

According to Kumar, the recent rally has been mainly driven by the tight supply crunch in the primary aluminium market. Now, the growing availability of aluminium scrap is likely to offset supply concerns over the upcoming months.

He elaborated that since “Scrap makes [up] around 32 to 33 per cent of the overall aluminium supply,” it has “a very important part” in the supply chain movement.

As the prices of aluminium tend to surge, within “six months down the line, there will be a deluge of scrap in the market, and that actually acts as a balancing factor,” Kumar added.

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He mentioned the 45 million-tonne-cap imposed by China on its primary aluminium production capacity at 45 million tonnes, as it continues to expand secondary aluminium production through higher domestic recycling and scrap imports.

Kumar expects the primary aluminium market to remain in a modest deficit, with global demand of around 75 million tonnes exceeding supply. However, once recycled aluminium is counted in, the total market expands to approximately 105-107 million tonnes, bringing overall supply and demand into near balance.

“Primary metal looks okay,” he noted, adding that “there is a deficit in the market, but if we account for scrap… it looks to me like a balanced kind of scenario.”

In light of this observation, the LME aluminium price graph throughout the month of June has recorded more of a declining trend rather than an upswing. The cash price has dropped by 16.73 per cent, from USD 3,795.5 on June 2 to USD 3,160.5 per tonne on June 29, indicating the cooling effect on the aluminium price benchmark.

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The firm also cautioned that a significant decline in aluminium prices could weigh on producers' earnings. Kumar observed that current market valuations assume aluminium prices remain close to USD 3,500 per tonne.

Although refraining from comments on individual companies taken in the research, Kumar emphasised that should prices fall towards InCred's projected range, earnings estimates and company valuations could face downward pressure.