Aluminium Looks Vulnerable to Pullback, Iron Ore Less so
Australia: If there is a common theme emerging from the recent strong gains in commodity prices, it’s that the extent of the rally isn’t justified by fundamentals and is therefore largely speculative. Assuming this market consensus is correct, it’s logical to assume that at some point the heat will go out of the market and prices will stabilise or retreat.
It would also be logical to assume that the gains in some commodities have been more justifiable than those for others, given the differences in supply and demand dynamics. The question then becomes one of which commodities will hold more of their gains and which will be most vulnerable to a shar- per pullback. Iron ore and steel may be among the commodities best positioned to retain some of their gains, while aluminium looks to be one of the more at risk.
The main reason for this is the changing dynamics of the Chinese economy and the efforts by various authorities in the world’s biggest commodity consumer to remove some of the trading froth that has built up recently. Aluminium on the Shanghai Futures Exchange has jumped about 17.6% since the start of the year to Tuesday’s close of 12,840 yuan ($1,981) a tonne, near its highest in 10 months. London benchmark aluminium hasn’t rallied quite as hard, but is still about 9% higher from the end of last year to Tuesday’s close of $1,648 a tonne. The problem for aluminium is that, unlike steel and iron ore, there hasn’t really been a positive shift in the supply-demand balance, rather the opposite is more likely to be the case. In fact, it appears that aluminium output has been increasing both inside and outside of China recently.
The word appear is used deliberately given considerable doubt about the accuracy of the figures from China, which have shown monthto-month variations that seem to bear little relationship to what is actually possible.
China’s output in March was 2.62 million tonnes, or 84,500 tonnes per day, up from 71,400 tonnes per day in February, according to the International Aluminum Institute , which gets the data from the China Nonferrous Metals Industry Association. — Reuters