Aluminum prices hit multi-week high. What’s next?

The base metals market had a difficult month, with all metals recording double-digit losses. Zinc and aluminium were the hardest hit, each down more than 12%. This decline was mainly due to growing concerns about demand for Porcelainthe world’s largest consumer of metals, and uncertainty about the timing of interest rate cuts.

However, the market turned the tide the following month and most metals rallied strongly, particularly aluminium, which managed to recoup its earlier losses. After plunging to near six-month lows, aluminium prices made an impressive recovery and reached highs of almost one month.

Prices rise amid hopes for stimulus and supply restrictions

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

Weaker dollar

A weaker US dollar has been a key factor in the recent surge in prices for aluminum and other base metals. As the dollar weakens, dollar-priced commodities become cheaper for buyers using other currencies, stimulating demand. This dynamic has been particularly beneficial amid persistent hopes that the US dollar will appreciate. Federal Reserve will begin to ease monetary policy in response to weakening US economic indicators.

Recent US employment data fell short of expectations, pushing the unemployment rate to a nearly three-year high of 4.3% and raising fears of an economic slowdown. As a result, traders are increasingly betting on a half-percentage-point interest rate hike. Reduction of rates in September, which would mark a significant shift from the more cautious approach the Fed had previously taken. These expectations have helped support industrial metals, including aluminum, despite broader market uncertainties.

China’s economic challenges

China, the world’s largest consumer of aluminium or, more accurately, metals, continues to face significant economic headwinds. Recent data show that Chinese manufacturing activity contracted 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 rest 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 welfare spending. However, details remain scarce, leaving the market uncertain about the potential impact on aluminium demand.

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

Supply constraints strain the market

On the supply side, shortages of key raw materials such as alumina and bauxite have further underpinned aluminium prices. Alumina prices in China recently hit a near three-month high on rising demand and limited supply, with inventories in warehouses monitored by the Shanghai Futures Exchange falling significantly in recent weeks. In addition, 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. If shortages persist, aluminium prices are likely to remain elevated, especially if demand from China picks up due to planned economic stimulus measures.

Perspective

Aluminum prices have been boosted by a combination of supply constraints, a weaker dollar, and hopes for economic stimulus in China. However, the market remains delicately balanced between these supportive factors and ongoing challenges. While recent price movements reflect positive sentiment, overall aluminum market fundamentals remain mixed. Despite tight supplies, weak demand from China and high inventories could limit future price gains.

Market participants are looking to upcoming comments from U.S. Federal Reserve Chairman Jerome Powell for clues on the speed of the U.S. monetary easing cycle. Any signs of a more aggressive rate-cutting approach could provide additional support to aluminum and other base metals.

For now, cautious optimism prevails, with the possibility of further gains if supply issues persist and global economic conditions stabilise. However, the road ahead is uncertain, as the base metals segment is likely to remain sensitive to recent developments in both the US and China.

(The author is a base metals analyst at Angel One. Opinions are his own.)