Aluminium prices spent most of the year below $2,000 per tonne and since mid-July have been below $1,800 per tonne despite available stocks nearly falling to their lowest in a decade. In addition, on-warrant aluminium stocks have not exceeded 1 million tonnes since January.

Still, we believe this year will bring another significant shortfall - we estimate that the global aluminium market will be in a deficit of as much as 1.8 million tonnes in 2019.

Although raw materials prices are significantly lower than they were a year ago, they continue to make up a large percentage of the LME aluminium price. Fastmarkets’ benchmark alumina index, fob Australia was assessed at $290.40 per tonne on Friday September 27, making up 17% of the LME aluminium price, a level that can result in very thin margins for aluminium producers.

Despite all of the positive fundamentals, the LME price remains below $1,800 per tonne, indicating a lack of confidence among buyers. In fact, according to the LME commitment of traders’ reports, the net short fund position remains high although it has recently been trending lower. Over the first eight months of the year, longs liquidated 1,988 lots while shorts added 25,604 lots to their bearish exposure.

We believe there are two reasons why LME aluminium is ignoring the fundamentals. First, trade tensions between the United States and China continue to impinge on investor appetite. Second, exports of Chinese semi-manufactured products are robust and growing - its exports were up 4% year on year in 2017, grew by a further 23.3% in 2018 and increased by another 8.2% in the first half of 2019.

We believe the rise in exports of Chinese semis has been one factor in depressing aluminium demand outside China - and is also one of the reasons why LME aluminium is less favored by investors.

Over the medium-to long term - due to the capacity swap program implemented by the Chinese government under which any new capacity needs to be matched by the phasing out of the equivalent amount of old capacity - we believe total capacity in China will be capped, while demand growth over the same time frame will continue. As a result, we are bullish on aluminium prices over that period

LME aluminium cash price, $/tonne

2019 forecast average price
$1,786

2020 forecast average price
$1,763