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Aluminum Prices Set to Soar, China’s Fundamentals Supportive

Wednesday, Apr 05, 2017

After a selloff in the beginning of 2016, aluminum prices soared sharply by 16% in the last seven months, supported by disequilibrium in demand and supply dynamics, thanks to strong production cuts from major producers after the recent selloff and expected capacity cuts from China. Traders’ sentiments were also bolstered by Trump’s aggressive expansion plan.

Moreover, a strong growth in auto and construction industry, which consumes almost 40% and 20% of global production, is likely to improve aluminum demand. Global auto and construction industry is expected to grow at a double-digit rate this year, while analysts expect aluminum demand to increase around 6.2% in FY17.

China, the globe’s largest producer and consumer, has also been making positive moves to strengthen aluminum fundamentals. For instance, Chinese auto sector is expected to grow at a stronger rate this year, which consumes almost half of China’s overall aluminum demand. Last year, passenger car sales in China increased 15% to 24.4 million.

Overall, auto producers’ strategy to use aluminum products instead of steel will generate a sustainable growth in aluminum demand.

On the other hand, supply side also looks supportive. China, the largest producer, recently announced to curb their air pollution, which could significantly reduce their aluminum output. Analysts expect an almost 30% decline in the aluminum smelting capacity in China, thanks to their plan to curb air pollution.

“We’ve got the broader rally in commodities, which have been playing out for a while now. Specifically for aluminum there is talk about capacity cuts in China because of environmental concerns,” said Bernstein analyst Paul Gait. Benchmark aluminum prices settled almost 0.5% lower at $1,952 a ton in the latest session, just below its twenty-eight months high of $1,981.

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