What Is Driving Aluminium Prices?

Aluminium prices have surged almost 17% in the current month. During February, the domestic spot aluminium market made a monthly high of 123.2 per kilogram where as the LME spot and 3 month forward were trading at $3,070 and $3,106 per ton respectively.

According to the International Aluminium Institute, global aluminium production in January 2008 decreased 2.3% to 3.23 billion tons from the record 3.308 billion level reached in December 2007. Production in China and Africa fell in January mainly due to severe winter weather in China and problems with cuts in power supplies affecting South African mines.

In 2008, global aluminium production is forecast to increase by 7% to 40.4 million tons and consumption by 8% to 39.9 million tons. China is expected to continue to be the main driver of growth in global aluminium consumption as investment in infrastructure to cater for rapid economic growth and large scale rural–urban migration continues at high rates.

Aluminium extraction being a very power intensive activity requires enormous power supply. Any disruption in power supply directly hits the output of the metal. The recent power problem in major producing centres like China and South Africa is the major cause of supply constraint in the commodity. China has been hit by the worst snow-storms ever in the past fifty years which led to a major loss of power as well the breakdown of transport network in the country, thereby resulting in the large output reduction.

A number of smelters, as well as other large industrial users of power, were forced to curtail their production in order that residential users could continue to be supplied in the freezing weather conditions. Electricity crisis in South Africa has led to the reduction in power usage by the major smelting companies. BHP Billiton [NYSE:BHP; LSE:BLT], the world’s sixth biggest producer of primary aluminium has said that it would gradually reduce its power usage to 90%. It owns two smelters in South Africa and one in Mozambique.

Apart from the power crisis, the other factor which drove aluminium prices up is the rising influx of investment funds in to the metals complex. Investment inflows in commodities have been on rising side as it is regarded as a hedge against the weakening dollar. Even speculative buying interest and higher other metals prices have added fuel to the existing upward trend.

Stockpiles monitored by the London Metal Exchange fell 0.97% in the month to 947,225 metric tons and cancelled warrants rose 17.96% to 36275. Any rise in cancelled warrants indicates the growth trend in the consumption pattern and vice versa. The cancelled ratio which is the proportion of cancelled warrants to the total inventory has been fluctuating in the range of 0.0316 to 0.0415 and it finally settled at 0.038 levels.

The contango period of LME spot and 3-month forward contract has been continuing for this month also. With the summer season on way, aluminium demand is expected to go up with the rise in consumption of packaged beverages. Packaging industry constitutes almost 22% of the total world aluminium consumption. Taking this in to account it can be said that the future demand is still much stronger than the current and hence the contango period is here to stay.

For the coming month, it is expected that the power problems in China will start slowing down and smelters in the country will start operating at their normal capacities. This would lead to some price correction the commodity. In the first week of March, South Africa’s Department of minerals and energy announcement about the ways to ease the power shortage in the country will be important to watch out for. If any reductions in power usage by the mining companies is been ordered, then the supply would get affected and we can see prices moving towards higher levels.