SMM monthly Aluminium MMI rose to 73 points in March, its highest reading in four months. After a period a period of price stability, aluminium prices are finally showing the first signs of strength, thanks in part to a weaker dollar in February. In their monthly outlook SMM has already recommended subscribers to buy up in volume.
So what is suddenly causing this strength in aluminium prices?
First, SMM reminds that aluminium prices are still near historical lows. This price bounce comes after significant declines in previous months and, not only aluminium, but all base metals have risen in price recently. However, some indicators within the aluminium industry are giving aluminium producers some reasons to become more optimistic.
China’s exports and production down
In January, China exported 380,000 metric tons of aluminium, down 12% from the same month last year. This is good news for international markets but, to be fair, one month doesn’t tell much of a story and certainly the aluminium exports will have to continue to come down if the aluminium market wants to see a deficit this year.
In January, China produced 2.5 million mt of aluminium, down 4.5% from January 2015. This was the second consecutive month where Chinese aluminium production fell on a year-on-year basis. Aluminium producers are getting quite optimistic on the combination of lower Chinese exports and production.
Surplus or deficit?
Although aluminium has been in a surplus for almost a decade, there is not a divided opinion on whether aluminium will continue to be in surplus this year or not. Alcoa, Inc. seems the most optimistic of all, foreseeing a record aluminium deficit this year with demand outpacing production by 1.2 mmt. Other producers are less optimistic and major brokerage houses such as Goldman Sachs even have a bearish forecast for 2016, predicting a record surplus this year.
What this means for aluminium buyers?
The trend in Chinese aluminium exports and production is a key factor to watch for the next few months. The slowdown in aluminium exports might have been driven by the steep decline in aluminium prices last year. As prices recover from January lows, an uptick in Chinese exports can be expected on a fair basis.
Weakness in the US dollar is another key factor to watch, so is the performance of the rest of the industrial metals. Finally, China’s worsening slowdown has been ignored over the past month, however it could bring the bearish sentiment back. If the Chinese government is unsuccessful in boosting its economy and global economic activity cools off further in the coming months, industrial metals might start to lose the recent upside momentum.
