Global aluminium price hinges on China production, observe analysts

With an interest-rate increase from the U.S. Federal Reserve out of the way, battered metals investors are returning their focus to China, where plans to trim a supply glut (read aluminium oversupply) have sparked hopes for a rebound in prices in 2016.

Price of aluminium is trading up 6%, from recent multiyear lows. Uncertainty about the Fed’s move and its impact on the U.S. dollar helped to keep a lid on metals prices ahead of the central bank’s announcement. Most commodities are priced in U.S. dollars.

But analysts say it is too early to declare a complete recovery and prices remain low by historical standards. Three-month aluminium futures on the London Metal Exchange are currently at $1,515 per metric ton.

“We expect to see some fundamental recovery only by second quarter next year,” said Helen Lau, an analyst with Argonaut Securities.

Some of the mild uplift is due in part to measures recently unveiled by China that aim to cut overcapacity in a few sectors. Chinese consolidation is likely to come in two forms. First, China has said it will merge state-owned companies in the sector.

“We expect China will enforce its supply-side reforms through 2016 and speed up industry consolidation in steel and other energy-intensive sectors,” Ms. Lau said. Earlier in December, China’s state-assets regulator said miner and metals trader China Minmetals Corp. would take over mine contractor Metallurgical Corp. of China.

Consolidation will also come with production cutbacks or closures. Chinese aluminum producers have all unveiled plans for production cuts over the next few months. China’s top 14 aluminum companies say they won’t restart production that has already been shut down and won’t begin production at any new smelters next year.