Aluminium price - getting giddy yet?

This time of year - the Northern Hemisphere Spring - is supposed to be one of blooming flowers and chirping young birds and crops beginning to burst forth. In the aluminium market we thought that Spring had arrived in April, when China’s aluminium price rose RMB1000 in just two weeks.

But now it seems another Northern Spring activity might be happening. The ancient pagan custom of “Dancing around the Maypole” throws back almost 1000 years, but seems to be the pattern in the recent aluminium price.

The China aluminium price rose from just below RMB12000 at the end of March to almost RMB13000 at its peak. It then gave up half that rise, and since the start of May has been weaving a merry dance around the RMB12000 mark.

Interestingly, along the way both the futures price and the physical price keep roughly in step with each other. Once the speculators left the dance floor a couple of weeks ago, the two prices have waxed and waned around each other, like the dance partners in the feature image.

It’s clear that underneath the speculative activity, real demand was helping boost the price. Our checks of the market reveal that several sectors are showing good growth signals - including high voltage cables, automobiles, white goods and consumer durables. What we are not seeing is any strong signal from housing and construction, although there seems to have been a pick up in home renovations.

More importantly, what we don’t know is whether the pick up in economic activity is going to be sustainable. It seems that the release of large amounts of credit in March is having the desired stimulus effect. But what happens once the effects of the government’s intervention wears off? Typically the release of large injections of money into an economy take a few months to wash through, so it may still take another month or two before the effect wears off. Will demand hold up, or will we see a retreat.

China had better hope that demand holds, because there’s more and more restarts of idled aluminium capacity. The improved price is bring 3 to 4 smelters per week back into the market, though again, it takes several weeks to get a full potline up to full speed.

There’s no question the image of a dozen maidens dancing around a giant pole is decidedly phallic. China had better hope the seeds of growth we are seeing in aluminium demand lead to a blossoming of the industry, otherwise the market is screwed.