Global aluminium price to rise in 2020 despite surplus, says Capital Economics

Global aluminium price is expected to rise this year even if, as the market flips from a deficit to a surplus. This is due to expectations that investors will focus on a more positive backdrop for aluminium demand, amid low inventory levels, according to the latest research report from Capital Economics.

Aluminium had a rough ride in 2019, reflected by the average annual price on the London Metal Exchange (LME) reaching a three-year low. The blame can largely be apportioned to factors on the demand side. Chief among these are the troubles in the global auto sector, which accounts for nearly 30 percent of aluminium end-use.

But consumption in other key areas such as electronics and machinery (a quarter of aluminium end-use) has also been weak. And while output growth has also been feeble, our net-demand proxy suggests that it is still outstripping demand growth, and points to prices remaining under pressure over the next couple of months.

However, aluminium consumption is likely to recover in 2020. The current downturn in global economic growth is likely to bottom out in the first quarter of 2020, and a gradual rebound should follow.

Admittedly, the pace of recovery is likely to be weak by past standards and is likely to be spread unevenly, with the US leading the way. But it should be enough to nudge aluminium demand growth back into positive territory, the report added.

"Accordingly, we forecast that global aluminium demand will rise by around 2 percent in 2020, following a decline of 0.5 percent in 2019," Capital Economics further commented in the report.

Meanwhile, a ramp-up of smelter capacity in China should lay the foundations for a recovery in global production. August’s outages in the Shandong and Xinjiang provinces compounded an ongoing slowdown in China’s aluminium output.

Meanwhile, output outside of China has risen recently, as gains in the Gulf states offset a decline in Europe. As a result, stocks earmarked for delivery on the LME and the Shanghai Futures Exchange have diverged, although the gap has narrowed in recent weeks.