Aluminium to correct lower on poor fundamentals, producer selling

Aluminium prices, which have risen on aggressive short-covering in recent weeks, are well above fair value and a correction lower is likely, Barclays Capital said.

Producer selling and poor fundamentals will be the drivers of this price correction of around 10 percent from current levels, the broker said in a report on Friday 7 June.

Three-month aluminium peaked on the LME on Wednesday at $1,981 per tonne, its highest since March 15. Prices have since retreated – they were last at $1,954 – but remain comfortably above the May 3 low of $1,809.

“The predominantly CTA-driven short covering rally seen across the base metals this week has naturally fired the debate over which members of the complex are now attractive for shorting,” BarCap said.

Although copper and zinc also benefited from the rally, aluminium tops the list, it added.

Fundamental developments in aluminium have been relatively uninspiring so far this year, with a seventh consecutive significant surplus still likely.

While the overall demand picture remains relatively robust – there was a clear improvement in the second quarter after a sluggish first quarter – it is “on the supply side where the weakness is clearest”, BarCap noted.

Despite LME prices trading as deep as the 35th percentile on the global cost curve this year, the pace of supply rationing has been anaemic, it added.

In China, close to 1.5 million tons per year of capacity has been suspended due to low prices but supply has grown 13 percent in the year to date on the same period of last year. This trend has been maintained because of “power subsidies supporting close to 30 percent of capacity alongside a smooth ramp-up of almost 2.5 million tons per year [in] new capacity in Xinjiang province”, BarCap said.