Recovery in Chinese economy, spurred by government spending, lifts global prices

The strong recovery in demand post-Covid lockdown is expected to keep aluminium prices high in the short term.

Though concern on second wave of Covid hitting the European countries remain a concern, the demand for aluminium remain robust across sector. Aluminium for November-end delivery on MCX was up 0.19 per cent at ₹159.40 a kg today (November 16).

The most active contract has risen six per cent in last one month on the back of enhanced demand.

The recovery in demand comes after 18 per cent fall in aluminium prices on LME to $1,450 per tonne between January and May amid Covid pandemic impact.

Since then the recovery in Chinese economy spurred by government spending led to global aluminium prices rising sharply.

Global economy revives

The price arbitrage between the LME and the Shanghai Metal Index, which reached $425 per tonne in July from $150 in April, also drove up LME prices. In September, aluminium prices soared to $1,750 a tonne and further to $1,850 a tonne last month.

With demand reviving in other major economies including the US and Japan, the average LME prices are projected to sustain at $1,650-1,750 per tonne this fiscal by analysts.

Three-month aluminium on the London Metal Exchange rose 0.3 per cent to $1,924 a tonne early this week on the back of fall in inventory and signs of strong demand. On the other hand, aluminium prices in Shanghai Futures Exchange hit three-year high on November 12 due to fall in inventories and an uptick in demand from some sectors in top consumer China.

The economic stimulus in the US and European countries had made credit available almost interest free and this cash is being deployed in most exchange traded metals including bullion and base metals.

Export dependence

The primary aluminium in India had to depend on exports as domestic demand plunged 45-50 per cent in June quarter following the nationwide and local lockdowns to contain the Covid pandemic.

The resultant economic contraction, labour shortage and logistic disruptions affected key demand segments – power, construction and automobiles – which account for over three-fourths of the demand pie.

Pragun Jindal Khaitan, Vice-Chairman and Managing Director- Jindal Aluminium, said domestic aluminium consumption in the construction and automobiles sectors plummeted during the Covid pandemic outbreak, while taking a significant hit from the other industries as well.

But the upsurge in manufacturing ventilator led to a new segment demand of aluminium extrusions.

Indian extrusion industries has been at the compounded annual growth rate (CAGR) rate of 7 to 7.5 per cent, even though the global Aluminium market grew with a CAGR of 5.5 per cent, he said.

So, domestic demand for aluminium rebounded in the September quarter.

Satish Pai, Managing Director, Hindalco Industries, said the recent spike in aluminium price is the combination of sharp recovery in demand and financial investment.

Moreover, he said the fall in inventory levels in LME is an indication that the supplies are getting tighter, he added.

The recent rise in prices of raw material such as coal and furnace oil is likely to keep domestic supplies tight as some of the producers would be forced to shut their output. The short supply in market will hold price on the higher side.