Analyst expects high crude oil prices will cushion sharp downside in Aluminum

Returns in case of Aluminum on a year-to-date basis stands at a negative 13 percent on the LME as weak global economic prospects has led to downside pressure on prices. Also, rising inventories acted as a negative factor for aluminum which have increased by 6 percent and 69 percent on the LME and the SHFE respectively. In the international markets, weakness in the DX has helped cushion sharp downside in prices. On the other hand, yearto-date returns are positive on the MCX and stand at 1.6 percent, as Rupee depreciation prevented downside.

The Economic Intelligence Unit (EIU) expects Chinese aluminum consumption to grow at a slow pace of 5 percent in 2011 after witnessing a rise of 10.5 percent in 2010. Apparent consumption in the first seven months of the year also saw a slowdown and this trend could continue for the fourth-quarter, owning to a tight monetary policy which had a negative impact on manufacturing and industrial growth. In the first seven months of 2011, apparent aluminum consumption in the US fell 7 percent year-on-year and a large part of this decline was on the back of cutback in production by Japanese carmakers in the US. Aluminum demand in North America has remained subdued on account of expectations of further slowdown in the economy. Data from the WBMS indicated that apparent consumption of aluminum in India was very weak between January to July 2011 as it fell almost 7 percent year-on-year. The WBMS expects that for the whole of 2011 demand may contract around 5 percent but it is expected to rebound in 2012, with stabilisation on the global economic front. According to the data from the General Administration of Customs, China’s imports of primary aluminium rose sharply by 40 percent (y-o-y) to 10,838 tonnes in September in the current year. On a year-to-date basis, imports decreased sharply by 19.4 percent to reach the level of 142,615 tonnes in the first nine month. China’s export for primary aluminium dropped sharply by 81 percent (y-o-y) to 1,164 tonnes in the month of September. Exports declined more than 61.3 percent (y-o-y) to 53,946 tonnes in the first nine months of 2011.

In the past two months, aluminum prices have remained volatile but have yet held up well as compared to other base metals, with high crude oil prices being one of the main reasons. Energy accounts for more than 40 percent of the production cost of aluminum and high crude oil prices lead to supply concerns, thus protecting sharp downside in prices in the near-term. Outlook: From the short term perspective, we expect aluminum to trade with a negative bias as uncertainty with respect to the European economic crisis remains. But high crude oil prices will cushion sharp downside in the metal.