Aluminium prices at multi-week high. What’s next?

The base metals market experienced a challenging month, with all metals posting double-digit losses. Zinc and aluminium were hit hardest, each falling over 12%. This downturn was mainly driven by mounting concerns over demand from China, the world’s largest metals consumer, and uncertainty about the timing of interest rate cuts.

However, the market reversed course in the following month, with most metals rebounding strongly, particularly aluminium, which managed to recover its earlier losses. After plunging to near six-month lows, aluminium prices staged an impressive comeback, climbing to nearly one-month highs.

Prices rise amid stimulus hopes and supply constraints

Aluminium prices have recently seen a significant boost, reaching multi-week highs, as expectations of US interest rate cuts and Chinese economic stimulus measures had fuelled market optimism. A tight supply of raw materials and a weakening US dollar have further supported the upward trend. However, the outlook remains uncertain as economic data from major metal consumers, particularly China, continues to send mixed signals.

Weaker dollar

A softer US dollar has been a key factor in the recent rise of aluminium and other base metal prices. As the dollar weakens, commodities priced in the greenback become cheaper for buyers using other currencies, stimulating demand. This dynamic has been particularly beneficial amid ongoing hopes that the Federal Reserve will start easing monetary policy in response to weakening US economic indicators.

Recent US jobs data missed expectations, pushing the unemployment rate to 4.3%, a near three-year high and heightening fears of an economic slowdown. As a result, traders are increasingly betting on a half-percentage-point interest rate cut in September, which would mark a significant shift from the Fed’s previously more cautious approach. These expectations have helped support industrial metals, including aluminium, despite broader market uncertainties.

China’s Economic Challenges

China, the world’s largest consumer of aluminium or lets say metals for that matter, continues to face significant economic headwinds. Recent data showed that China’s manufacturing activity shrank in July for the first time in nine months, as new orders declined, and overall demand remained weak.

The Caixin/S&P Global manufacturing PMI fell to 49.8, reflecting a contraction that raises concerns about the country’s growth momentum for the remainder of 2024.

In response, Beijing has hinted at further stimulus measures aimed at boosting domestic consumption, which could include subsidies for household goods and increased social welfare spending. However, specifics remain scarce, leaving the market uncertain about the potential impact on aluminium demand.

Despite these challenges, China’s surprise rise in aluminium imports indicates some underlying resilience, as domestic production remains robust.

Supply constraints tighten the market

On the supply side, tightness in key raw materials like alumina and bauxite has further underpinned aluminium prices. China’s alumina prices recently hit a near-three-month high due to growing demand and limited supply, with inventories in Shanghai Futures Exchange-monitored warehouses dropping significantly over the recent weeks. Additionally, disruptions in bauxite shipments from Guinea, the world’s top producer, and production cuts outside China have contributed to the supply squeeze.

These supply constraints are critical because alumina and bauxite are essential for aluminium production. As these shortages continue, they are likely to keep aluminium prices elevated, especially if demand from China picks up due to anticipated economic stimulus measures.

Outlook

Aluminium prices have been buoyed by a combination of supply constraints, a weaker dollar, and hopes for economic stimulus in China. However, the market remains finely balanced between these supportive factors and ongoing challenges. While recent price movements reflect positive sentiment, the overall market fundamentals for aluminium remain mixed. Despite tighter supplies, weak demand from China and high inventories could cap further price gains.

Market participants are closely watching upcoming comments from US Federal Reserve Chair Jerome Powell for clues about the speed of the US monetary easing cycle. Any signs of a more aggressive rate-cutting approach could provide additional support for aluminium and other base metals.

For now, cautious optimism prevails, with the potential for further gains if supply issues persist and global economic conditions stabilize. Yet, the road ahead is uncertain, as the base metals segment is likely to remain sensitive to the latest developments in both the U.S. and China.

(The author is analyst, base metals, Angel One. Views are own)