Our Aluminum MM index rose 3% to 72 during the month of December from 70 in November.
Is this upward move something to be worried about? Or excited about? We don’t think so.
As soon as prices rise a tick, people try to find the fundamental reason for that price increase. Sometimes they can even, somehow, make the case that the outlook is set to improve. But in the case of aluminum, nothing really improved in December.
First, aluminum has declined more than 30% on the year-to-date. A 3% increase after such a price slump means nothing. Indeed, aluminum producers should be worried that prices are not able to make a decent rally from these low levels. That only means that investors are only interested in selling, not buying.
Supply and Demand
Fundamentally, we didn’t see anything this month to make us more bullish on aluminum. The State Reserves Bureau in China announced intentions to buy a 1 million tons, or possibly twice as much, to help smelters awash in the metal. Some might take this as bullish news, but we doubt that can make the outlook any brighter. To us, this purchase would only represent a change in ownership of existing unsold stock, irrelevant to the future global market balance.
There is no shortage of metal and aluminum continues to flood out of China. December marks another month without significant production cuts. There have been reports that Chinese smelters plan to reduce some of the excess capacity but it seems like markets would like to see some real action on this front. In China, the most smelters have done involves taking smaller capacity offline for “maintenance.”
The slight increase in aluminum prices was mostly because of a weaker dollar in December which also helped most industrial metals hold their value during the month. China’s slowdown is the long-term price driver and we recently saw Chinese manufacturing numbers disappoint, adding more worries about overall weak demand. That alone, will likely keep a lid on aluminum prices.
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