Like most other base metals, Aluminium has been on a tear this month, hitting the highest level in over five years on the Shanghai Futures Exchange on Thursday.
Just look at the scale of the increase seen this month in the front-month contract, driven by a sharp pickup in trading activity.
According to Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, while a pickup in speculative activity explains some of the recent move, most of the increase has come from supply-side reforms in China.
“Some government measures have already been enacted, via the crackdown on illegal capacity in the provinces of Shandong and Xinjiang,” he says. “Some cuts, such as those associated with anti-pollution concerns, are still yet to come.”
Dhar says the crackdown on illegal operators is likely to have a larger impact on physical aluminium markets, potentially eliminating as much as 6.2% of total global output.
And, even if the cuts eliminate a far smaller amount of global output, he says that will likely see global aluminium markets swing from surplus to deficit, adding to potential upside for prices.
“Even assuming only modest cuts to Chinese aluminium production this year will likely mean that global aluminium markets will go from surplus to deficit,” Dhar says.
“New supply is mitigating the output cuts to some extent, but not enough to halt the aluminium price increase.
“The gains in aluminium are likely the most sustainable amongst the base metals given the backdrop of Chinese supply-side reform.”