Aluminum Outlook 2017: Will Prices Stabilize?

Like many commodities, aluminum had a tough time in 2015, but the metal has rallied this year due to the appearance of a tighter market.
Falling stocks of aluminum in warehouses together with a decrease in Chinese output, have increased market participant’s sentiment.
Here’s a review of what happened in the last twelve months and what is ahead in 2017 for aluminum.

Prices

Aluminum prices have been gaining this year owing to an improved supply-demand dynamics, the Trump win and higher coal prices.
“Optimism is returning because of the potential that exists in the form of fiscal stimulus, infrastructure spending and tax cuts,” said Robert Pavlik, chief market strategist at Boston Private Wealth in New York.

This year, according to Zacks, global aluminum markets are anticipated to record their first deficit year in a decade.
Aluminum started the year off just above $1450 a ton but the increase in demand mostly from China’s steel sector and a tightening supply chain, pushed prices higher.
Last year loss-making Chinese smelters shut millions of tonnes of capacity, but prices surged nearly a fifth from a low in January to a 13-month peak in August, Reuters reported.
“The aluminum market has in fact found its stabilization point this year for the first time in five years,” Rusal Deputy Chief Executive Oleg Mukhamedshin said at the Reuters Russia Investment Summit in Moscow on September.
Rusal expects aluminum prices to stabilize within a $1,600-1,700 per tonne range next year if China does not increase production, global stocks keep falling and demand grows.
Aluminum alloy prices are currently at $1,712 per tonne, over 15 percent gain from the lowest point at the beginning of the year.

Supply and Demand

China continued to have a large production, reaching 32,000 MT of aluminum in 2015, and at the time, planned to reduce output.
However, daily average primary aluminum output hit a record high in September, driven by buoyant output in the Asian country, data from the International Aluminium Institute showed.
“The rally in Shanghai aluminum prices so far this year has improved profitability and is encouraging restarts. There are also ongoing additions to capacity,” said Caroline Bain, senior commodities economist at Capital Economics in London.
Expectations that Chinese smelters could restart production, some of which were idled last year after prices decreased below $1,500 a tonne, their lowest in more than six years, could also affect prices.
“More Chinese smelters will restart and aluminum prices will come under pressure in the fourth quarter or early next year,” CRU analyst Wan Ling said. “We expected about 1.7 million tonnes of capacity would be restarted this year, but so far only 700,000-800,000 has restarted.”
In addition, global aluminum production grew to a record high of close to 5 million metric tons in October. The significant amount of stockpiles held in warehouses around the world is one of the main ongoing challenges for the aluminum market.
On the other hand, aluminum demand witnessed growth of 5 percent in 2016. Chinese demand, which accounts for about half of total demand, is likely to be maintained by the building and construction sector as well as the automotive and railway sectors.
European Aluminium sees continuing growth for the continent going forward. Even in the face of overcapacity from China, the Association sees a 1.1 percent growth rate for 2016 and a 1.7 percent rate in 2017.
Gerd Götz, European Aluminium’s director general, said: “Our forecasts for 2016 and 2017 show steady growth in both production and demand across the aluminum value chain in Europe,
“Clearly aluminum is the preferred material for applications with strategic value for a sustainable economy, such as transport, packaging and buildings.”

But it’s expected aluminum will continue to fall behind other metals in 2017 in terms of price growth as a result of oversupply.
“As we expect to see further production increases in the next few months, a record-high quantity of aluminum is likely to be produced on a whole year basis,” states a Commerzbank report.
A report from the Aluminium Association showed that total demand was up more than 37.4 percent since 2009 in North America. Despite this, imports of aluminum and aluminum products increased 9.8 percent over 2014, to their highest level since 2005.
Heidi Brock, President & CEO of the Aluminum Association, said: “We share the concerns of many other aluminum-producing regions about the dramatic spike in metal imports illustrated by the report.
“We believe this import growth is a direct consequence of persistent aluminum overcapacity in China.”

Investor Takeaway:

What will happen in the aluminum market in 2017 will depend on China’s production and demand, that could help prices stabilize. In addition, the increasing optimism surrounding the policies that might be implemented by Trump could also allow the metal’s price to continue to surge. Investors need to pay attention to how the steel industry develops next year and whether stocks in warehouse will continue to fall.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.