Aluminium to underperform against the rest of the base metals sector in coming months – ANZ

Aluminium has been one of the best performers in the base metals sector as the Chinese stimulus has boosted demand. And while the outlook remains positive, there are signs things are abating. More importantly, there is a wave of supply threatening to overwhelm the market, strategists at ANZ brief.

Key quotes

“Demand has been supported by strong growth in the automotive and construction sectors, with double-digit growth rates. And the outlook remains positive amid China’s infrastructure investment stimulus measures. Plans for 5G networks, ultra-high-voltage power transmission, urban infrastructure and big-data centres, in particular, are good news for the light weight metal.”

“We expect China to add 3.2% (1.9mt) to production next year followed by 4.8% in 2022. The outlook for the rest of the world’s output growth is more conservative with a 1.2% expansion of 1% gain in 2021. Even so, the risks are skewed to the upside. At current levels of around $2,000/t, virtually the entire supply chain is cash-flow positive. With inventory financing still financially attractive, producers can continue to expand comfortably, with the knowledge that they are likely to find a buyer without impacting prices dramatically. We, therefore, estimate that the market will record a surplus of 2.59mt this year. This will only diminish slightly in 2021 amid slightly stronger demand from the world beyond China. Nevertheless, we see global inventories building by more than 3mt over the next two years.”

“It’s hard to envisage sentiment waning in the short term, with stimulus measures in China continuing to paint a positive outlook. However, we feel prices have run ahead of fundamentals and expect aluminium to underperform against the rest of the base metals sector in coming months.”