As the world’s majority producer and consumer of aluminum, China will always have an impact on the metal’s prices, but given the economic distress experienced by China in recent months, all eyes are on aluminum and the Far East in 2016.
We’ve identified the main price drivers for aluminum next year as:
1 China GDP & PMI Data
2 China export volumes
3 Dollar to Euro exchange rate
4 Oil prices
5 Primary aluminum production
6 MW Premiums
7 Capacity utilization
8 European & Japanese premiums
China accounts for more than half of the world’s aluminum output and consumption. The aluminum surplus in China has widened over the last few quarters, which caused a surge in aluminum exports, distorting the global supply-demand balance. Current prices however have already made Chinese aluminum exports unprofitable. Although exports have fallen in recent months, they are still up 22% compared to last year.
A falling Yuan could make Chinese exports more competitive but sinking aluminum prices could eventually cause a sustained drop in exports, reducing the glut in supplies. Many aluminum producers including Century, Alcoa and Rio Tinto have already cut production and moved to more efficient smelting production. On top of that, aluminum premiums have dropped more than 67% this year, placing even more pressure on the profitability of domestic producers. Over the last three months, premiums appear to have stabilized at lower levels.
Despite the fact that low prices have already caused producers to cut production, we believe that it will still be a while until aluminum prices make a substantial upward price move. Weak demand puts pressure on prices as China’s manufacturing, automobile and real estate activity (though some portions of the Chinese construction market appear healthier) continue to sag. Moreover, while we continue to see a strong dollar and fears about China, investors appear to have little incentive to buy aluminum.
At some point, prices will make a comeback but until we see signs of a bottom, we continue to expect lower prices as we enter 2016. Based on current market conditions, we could see 3M aluminum prices averaging $1,550/mt in 2016. The lows seen during 2009 ($1,350/mt) could act as a support through the year. Buyers should consider fluctuations below $1,840/mt as normal within the falling market, and reconsider their strategy if prices break above this resistance level.
We look forward to the development of the aluminum industry getting better in 2016.