Investors keeping an eye on aluminum prices are no doubt well aware that the metal has been in a consistent state of weakness in 2015.
Cash contracts for the metal are currently trading at $1,507 per tonne in London, down from April, when they were changing hands at about $1,818.
Overall, China can be blamed for aluminum’s poor performance. The country’s stock market crash earlier this year brought down a large basket of commodities, including base metals like copper and iron, as well as critical metals like manganese and tungsten; of course, industrial metals like aluminum and vanadium were also affected.
What’s even worse is that the aluminum outlook for 2016 does not look much better.
Falling aluminum stockpiles, falling aluminum prices?
Interestingly, aluminum’s suffering has been accompanied by declining warehouse inventories. In fact, Bloomberg reported that in November, the LME experienced a 21-percent surge in canceled warrants, which translated into 1.1 million MT over the course of three days early in the month.
Typically, a drop in warehouse inventories signals that a market is active, and getting tighter. And indeed, given that the aluminum market has seen cutbacks and smelter closures over the last few years, it would only make sense that prices for the metal would react accordingly. Unfortunately, that hasn’t happened with aluminum.
Explaining the imbalance, Leon Westgate, an analyst at ICBC Standard Bank in London, told Bloomberg, “[i]t’s unlikely to be related to real demand. With the large tonnages like that, it’s likely to be finance-related. It’s likely to be material moving to an ex-LME location.”
On that note, Reuters reported in December that warehouse inventories have been painting a false image of the aluminum market. Essentially, states the news outlet, official aluminum warehouse inventories are falling, while “unreported stocks are surging to record highs.” CRU estimates that total global aluminum inventories, including unreported stocks, have edged up 1.3 million tonnes in 2015, bringing the market to an all-time high of about 15 million tonnes.
This market oversupply is likely to continue to put pressure on aluminum prices, which have reached their lowest levels in more than six years.
China’s oversupplied steel industry bad news for aluminum outlook
As mentioned, China is having a difficult time, and as a result the materials it once imported in vast quantities are now having a hard time finding a home. The upshot is that the longer it takes China to clean up its act, the longer metals prices will be depressed.
Deutsche Bank (NYSE:DB) is not optimistic that 2016 will be any better for steelmaking metals. “The mining sector, in hindsight, has massively overshot in terms of their expected delivery for iron ore into China in the next few years,” research analyst Jorge Beristain told CNBC.
The analyst also pointed out that over the last year and a half, China has become a big exporter of steel, an “unexpected U-turn” for the country. He added, “[a]nd that flood of product, whether its steel or aluminum, is looking for a home globally — driving down world prices for those commodities.”
To deal with the oversupply issue, 14 of China’s top aluminum companies have said that they won’t restart production shut down previously. The firms have also said they will not open any new smelters in the coming year. With the expectation that supply will be cut, prices reacted accordingly and bounced up a tad this month.
However, as Daniel Hayes, an analyst with ANZ Banking Group (ASX:ANZ), told The Wall Street Journal, “a sustained aluminum price recovery would depend on deeper cuts and on how well China’s economy performed in the next three to six months.” In other words, before investors can expect a turnaround, the market is in dire need of a rebalancing.
Securities Disclosure: I, Vivien Diniz, hold no investment interest in any of the companies mentioned.