Aluminium – Commodity Analysis and Forecast Report

Over the last decade, aluminium prices have been far from stable as it fluctuates between the range of $1,604 – $2,638 per metric ton from 2012 to 2016. Like most commodities after the financial crisis, aluminium prices plummeted after 2008. Nevertheless, an increase in demand from China meant that prices had increased shortly afterwards. The rationales behind the price increase are twofold: firstly, there was excess global supply due to an overestimation of Chinese imports from African and European countries. Secondly, China’s eagerness to expand its own smelting capacity, which paved the way for China to become the largest producer of aluminium – from providing 22% of aluminium’s world production in 2004 to 57% in 2018.  

Applications of aluminium   

The combination of lightness, strength, and corrosion resistance are among the reasons why aluminium appeals to businesses in the automobile and airline industries. Aluminium’s popularity in the automobile industry can be attributed to the vital role aluminium plays in improving cars’ braking functions and dent resistance, whereas the airline industry also helps driving up aluminium demands because aeroplane manufacturers rely on aluminium alloys to make cabin panels that can withstand the enormous pressures and stresses of high altitude flying.  

(Source: World Bank)  

Factors like supply & demand and geopolitical issues are always the main drivers of commodity prices. World Bank’s graph shows that there is a clear correlation between the price movement of aluminium and car production demands. By analysing the supply & demand and geopolitical issues associate with aluminium, investors can build a clear picture of the outlook and growth potential of aluminium.  

Impact of COVID-19 

Despite aluminium prices struggling throughout 2019, it was widely believed that global demand would rise in 2020. This was due to a marginal increase in aluminium prices but more so because of the rise in demand for aluminium because aluminium could be used as a substitute for copper in the electric power industry. However, the optimism faded once the effects of the pandemic began to transpire. From 22/1/2020 to 8/4/2020, prices had fallen from $1,807/t to $1,421.5/t (21.49%).  

Aluminium price

(Source: Mining Technology) 

Manufacturing closures in China has created a negative knock-on effect. Their vital role in supplying materials to the West has meant that the supply chain collapsed and consequently, forced external manufacturers to reduce or find new supply sources. This has not yet manifested into a major supply problem as such but could lead to one in the future. Even so, a greater decline in demand has led to a decline in aluminium prices. More specifically, with supply significantly outstripping the demand, aluminium will be subjected to volatile price movements.  

The aluminium market is gradually recovering partly because of its function in medical devices. More notably, amongst ventilators, to help those who have contracted the virus to breathe. In fact, the US Aluminium Association has urged the state to deem the production of aluminium as ‘essential’, thereby enabling manufacturers to meet this demand. Currently, aluminium prices have risen since April to $1701.25. As economies re-open, prices can continue to increase if there is a significant reduction in the number of inventories (23% increase in aluminium stockpile from Q4 2019 to the end of Q1 2020).  

Outlook    

The fall in aluminium price and car production growth shows that the COVID-19 pandemic is causing a steep decline in global manufacturing activity, despite governments and central banks around the world introduced unprecedented economic stimulus plans to support demand. In Q1 2020, the demand for car production decreased by over 30%, which is the steepest decline since the 2008 Financial Crisis. Such steep decline is understandable considering that the Institute for Economic Research revealed that Germany – the leading car manufacturer in Europe – recorded a 36.5% decrease in car production.  

(Source: International Aluminium Institute)  

Despite the demand for car production has weakened, there were limited cutbacks in aluminium production. China, the largest aluminium producer in the world that accounts for 57% of the global aluminium production in June 2020, recorded a 2.4% y/y growth in aluminium production during the first two months of 2020. Sustaining growth in aluminium production amidst of weak consumption outlook in the automobile market inevitably led to a rise in inventories because aluminium producers would need more space to stock surplus aluminium – the Shanghai Metals Market recorded a 57.6% rise in global aluminium inventories is a case in point. With the rise in global inventories creating more downward pressure on aluminium prices, it may be difficult to see aluminium prices recovering from a seventh consecutive quarterly decline in the latter half of 2020.  

Nevertheless, geopolitical tension in Guinea provides some optimism to aluminium prices. According to the US Geological Survey, Guinea accounts for 15% of the global bauxite production and China imports over 29 million tonnes of bauxite (a sedimentary rock with high aluminium content) from Guinea annually. But the current political unrest in Guinea is disrupting the bauxite supply chain as anti-government protests continue at major cities like Conakry and Mamou, which creates an upside risk to aluminium prices because political unrest could impact exports into China. Expectations of supply cuts and the decline of Chinese inventories in Q2 2020 facilitated a 1.8% rise in aluminium prices.  

Final analysis   

Despite rising supply disruptions, aluminium prices struggle to maintain consistent growth. Coupled with the expectations of prolonged public health and financial crises in 2020, aluminium would be subjected to volatile price movements as the global economy remains uncertain about the effectiveness of stimulus plans and the time it would take for global industrial demand returning to pre-coronavirus level.  

Apart from supply & demand and geopolitical issues, the airline industry’s unprecedented free fall is another factor that can create downward pressure on aluminium prices. Airbus, the second largest aircraft producer in the world, has announced it will cut aircraft production by a third in response to the declining demands for airline services. Such cost-cutting production cut from one of the prominent market leaders not only further reduce aluminium demands, it also affirms the negative outlook on the short-term growth potential of the aluminium market.   

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Industry jargons:    

y/y: An abbreviation for the phrase ‘year-over-year’. It is a financial performance measure that compares two quantitatively measurable events. Year-over-year performance provides an indication on whether the price of a commodity has increased, decreased, or remained static compare to the year before.   

Downward pressure: Ample supply would exert downward pressure on the price of a commodity. Downward pressure is exerted by market forces and the pressure will stop once equilibrium is achieved i.e. quantities supplied equal to quantities demanded.  

Upside risk: The rise of commodity value due to changes in market conditions e.g. GDP growth, ‘high demand – low supply’.   

Market equilibrium: The balancing effect of supply and demand. In a graph, market equilibrium is achieved when the supply and demand curves intersect with each other i.e. when aggregate supply (AS) is equal to aggregate demand (AD).   

Price volatility: Factors that can lead to commodities being subjected to volatile price movements include supply-and-demand issues, geopolitical tensions, currency fluctuations, and economic decline/growth.  

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Bibliography    

Bray, E.L.  

2020. Bauxite and Aluminium Statistics and Information. US Geological Survey. pp. 1-5.   

Efanova, D., Wilkes, G.  

2020. Quarterly Metal Reports: Analysis and Forecasts for Base Metals, Precious Metals, Iron Ore & Steel. Sucden Financial. pp. 2-26.  

Fofana, K., Phillips, J.  

2020. Guinea’s election had a clear winner. But its contest for power isn’t over. African Arguments. pp. 1-2.   

International Aluminium Institute.  

2020. Total for June 2020: 5,274 thousand metric tonnes of aluminium. Primary Aluminium Production. pp. 1-3.  

Nguyen, M.  

2020. Shanghai aluminium hits near 4-weeks high as China inventories dip. Thomas Reuters. pp. 1-2.  

Schultz, H., Wollmershauser, T.  

2020. Structural Change in the Automotive Industry is Weighing on the German Economy. Institute for Economic Research. pp. 1-2.    

Shanghai Metals Market.  

2020. Metal news of Aluminium. SMM. pp. 1-2.  

World Bank Group.  

2020. Commodity Markets Outlook: Implications of COVID-19 for Commodities (April 2020). World Bank. pp. 1-47.   

Salter, J. 

2020. COVID-19: impact on the aluminium industry and reasons to be positive (May 2020). Hatch. pp. 1-2. 

Trefis Team. 

2019. Aluminium Prices: 15-Year Price Analysis And Production-Demand-GDP Dynamics. Forbes. pp. 1-2. 

AmInvestment Bank. 

2020. Gradual recovery forecast for buildings materials prices (June 2020). The Star. pp. 1-2. 

Mining Technology. 

2020. The impact of Covid-19 on the aluminium industry (April 2020). Mining Technology. pp. 1-2. 


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