Why Have Aluminum Prices Risen Sharply In Recent Months?

by Trefis Team
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Aluminum prices have risen considerably in recent months, as illustrated by the chart shown below.

LME Aluminum Prices, Source: LME

LME aluminum prices have averaged close to $1,900 per metric ton so far this year, around 18% higher than the average for last year. Aluminum prices have been impacted by factors influencing both the demand and supply of the commodity in China, the world’s largest producer and consumer of the metal.

In response to indications of slowing economic growth, the central government in China instituted a fiscal stimulus targeting the infrastructure sector last year. [1] The stimulus has certainly propped up faltering economic growth, at least in the near term, and boosted the demand outlook for industrial metals such as aluminum. As per the IMF’s World Economic Outlook, Chinese economic growth in 2017 is now expected to match the 6.7% reported last year, though growth could decline marginally next year. [2] While prices have certainly reacted to a firming demand outlook, the closure of excess production capacity has provided additional impetus to prices. The Chinese government has been cracking down on aluminum smelters that are excessively polluting. [3] The government’s efforts are expected to translate into the closure of around 4 million metric tons or around 10% of the country’s total smelting capacity. [4] Considering that China accounts for nearly 60% of global aluminum production, the closure of even a tenth of its production capacity significantly impacts the global balance of demand and supply. [4]

We have currently factored in a 16% year-over-year increase in 2017 for Alcoa’s realized aluminum prices, which are linked to LME spot prices.

While we remain skeptical about the sustainability of stimulus-driven demand in the long term, we do recognize the favorable impact of the closure of excess capacity on prices. We will keep monitoring developments in China, as these certainly dictate the trajectory of global aluminum prices.

Have more questions about Alcoa? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Alcoa

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Notes:
  1. China Blowing Major Bubbles In 2017, Forbes []
  2. WEO July Update, IMF []
  3. This Is Why Aluminum Is at Its Highest Price in Nearly Three Years, The Street []
  4. Aluminum Price Forecast, August 2017: Chinese Activity Buoys Pricing, Metal Miner [] []
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