Aluminium outlook bullish, supported mainly by China - Goldman Sachs

Chinese demand boosted by good economic indicators, auto-makers demand

Goldman Sachs gave their outlook for aluminium as "bullish" supported by several factors such as rise in Chinese demand indicated by a fall in inventories at the London Metal Exchange, Shanghai Futures Exchange and COMEX amid constrained supply in the country.

In a report released on May 2, 2012, its positive outlook on the silver metal  also emanates from a slew of other factors such as the rise in waning political instability in Europe and hopes of modest growth in the US demand.

According to data from LME, inventories at the exchange monitored warehouses fell below 500,000 tn today, down 14,125 tn, for the first time since Febuary 3, 2012. Falling inventories indicate a pick up in demand.

Chinese demand was fuelled by Industrial profits for March which were up 4.5% year on year compared to (-5.2%) year on year in Jan-Feb period. Chinese purchasing managers' index also grew to 53.3 in April from 53.1 in March. A figure above 50 indicates expansion of the economy.

Chinese aluminium output has also been almost flat since 2011. In the year, when the entire base metal complex had declined majorly, with nickel prices leading the declining list by an almost 24% fall in prices, Chinese smelters decided to cut production. According to the report from Goldman Sachs, new smelters were runing at very low utilization rates because margins were too low to incentivize extra production.

It would be time before smelters start increasing their production because of high cost of production. Supply constraints pushes pricse higher.

China saw a 2% decline in year on year output, while in the first quarter of FY12, aluminium production only grew 0.2%.

China's flat output was not the only one which put supply constraints in the global markets. Africa's output fell by 14%, Western Europe was down by 1.6%, North America 4.3%. GAC/Gulf was the only region to post growth in aluminium output at 8.4%, partly offsetting other declines, the Goldman Sachs report said. This pressurised aluminium prices and rose due to pick up in demand and issues of supply in the global market.

Analysts are also banking on the view that Europe will stabilize politically and economically which would increase the risk appetite and demand  of investors. They are also hoping that the moderate growth figures that the US has given in the past few months would continue.

Easing global economic concerns would fuel demand prospects of risky commodities like base metals that move in tandem with the health of the economy.

"Aluminium contract on the LME is currently trading at $2,083 per tonne and the three-month contract on the international exchange has a strong support at $2,050 a tonne and resistance at $2,145 in the coming weeks," Priyanka Jhaveri, base metals analyst with Kotak Commodity Services, told Business Standard today.

"Aluminium is fundamentally firm with good demand from the auto sector globally and fall in LME inventories," she said.

On the MCX, the most active aluminium contract wa trading at Rs 111 per kg. The contract is likely to get support at Rs 108 and face resistance at Rs 114 in the coming weeks, Jhaveri said.