Goldman Sachs predicts short to medium term risk reward for aluminium

The short to medium term risk reward for aluminium is attractive from current price levels, Goldman Sachs said in a research note Monday.

Although the investment bank has lowered its near-term three-months aluminium forecast to $2,200/mt from $2,400/mt, its current base case remains solid on the upside and the bank is forecasting a potential increase of 11% from current price levels.

The bank has left its six- and 12-month aluminium forecasts unchanged.

Goldman Sachs is recommending reduced downside risk on expectations that policymakers will be able to contain the eurozone crisis and that the US and China will support global economic growth of 3.3% in 2012.

"With commodity markets pricing a far more negative outlook than this, we expect that as policymakers continue to address the European debt issue and the economic data stabilizes, markets will move substantially higher," the bank said.

For aluminium, Goldman Sachs expects minimal to no growth in output and says any growth in consumption will result in tighter fundamentals and higher prices.

"The overcapacity and high stock levels which would likely cap aluminium prices are not issues that would restrict a temporary but significant price rally, since inventories are tied up in 'financing deals'," the bank said.

Goldman Sachs supports this view with the fact that aluminium traded up to around $2,800/mt in 2011 with similar overcapacity and stock levels seen in the current market.

In addition, it would take China three to four months to ramp up capacity in response to a price rally, the bank said.