Downside in aluminum prices is possible

A supply glut amid continued sluggishness in the global economy continues to depress prices of aluminum. Even production cuts by major global companies have failed to prop up aluminum prices, with a dip in automobile purchases primarily responsible for capping demand worldwide. Any recovery will hinge on an upswing in the global economy's fortunes, according to the thematic research report of Motilal Oswal Commodity.

According to the study, supply side remains more problematic in our view. Despite the curtailment announcements, we believe further cuts are needed internally in China and in the rest of the world, with new capacity additions and old smelters being given a new lease of life, outweighing the capacity closures announced.

The report states: ""With a change in the rules on LME warehouses, we will see the premiums for delivery fall. While China's production volumes will have a major bearing on aluminum prices, the premium rates are very much linked to Japan, which is Asia's largest importer of the metal.""

The tide has still not turned for aluminum and some more downside cannot be ruled out. On the LME front, the metal has supports close to $1740 below which it will once again enter the bear market. We do not expect prices to hold below $1740 for the medium term. On the MCX the price ranges in even broader as the INR fluctuation keep the metals volatile.

Short term supports are at Rs.109 while medium term supports are close to 103. We do not expect prices to hold these levels for the next few months.