Aluminum Prices Steady on China Uncertainty

Aluminum hit a six-year high in August and was the only major base metal to resist sentiment headwinds, according to the latest Commodity Price Index from Scotiabank.
The September 13 report notes that copper and zinc are down 2 to 5 percent week-on-week, while aluminum has held its ground due to uncertainty regarding Chinese supply. China has made moves to curb pollution in its northern provinces by extending smelting capacity cuts.
Analysts with JPMorgan (NYSE:JPM) predict that aluminum prices will rise another $100 in the fourth quarter on the “collective realization that supply reform is a reality, despite Chinese aluminium inventories more than quadrupling so far this year.” That said, the analysts added that higher prices will probably lead to the restart of smelters outside China, ultimately “pushing the global market into a surplus.”

Andrew Estel, vice president of strategic planning and analysis at Alcoa (NYSE:AA), has also voiced concerns about overcapacity in China. Speaking earlier this month, he predicted a 1-percent global aluminum surplus in 2017, with China’s surplus expected to be larger at 2.2 to 2.4 percent. He added that Chinese demand for aluminum is expected to increase by 7 percent this year, ahead of the global rate of 5 percent. Estel said China represents over 50 percent of world demand for primary aluminum. 
Developments across the world and in the US are also helping to support aluminum prices. A recent report from the US Energy Information Administration notes that primary US aluminum production has decreased by over 50 percent over the last three and a half years. The decline has been partially attributed to higher labor costs, which have caused plants to downsize their operations. About 140,000 MT were being processed on a monthly basis up until the summer of 2015, but current production levels are at about 60,000 MT per month.

Latest aluminum developments

This week, the world’s second-largest aluminum extruder, China Zhongwang Holdings (HKEX:1333), announced plans to buy Germany’s Aluminiumwerk Unna. The German firm supplies aluminum products to aviation and auto firms, including Airbus (EPA:AIR) and Mercedes Benz. The companies did not provide a value on the deal. Another Zhongwang company, Zhongwang USA, intends to close a deal to buy US firm Aleris (NYSE:ARS) despite opposition from US senators. Zhongwang said the deadline for the Aleris transaction to close is September 15.
Tajik Aluminum Company also announced this week that it plans to increase its production of primary aluminum to 300,000 tons by 2020. Company representative Igor Sattarov said the decision was based on current favorable market conditions and a positive forecast for the future.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.