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Below is the Aluminium Article - June by Mr. Saish Sandeep Sawant Dessai,  Research Associate- Base Metals, Angel One Ltd

Half of 2022 is over, where we have seen some wild swings in the metals sector. Aluminum, the light metal has declined by 8.36 percent (YTD as of 12^th July) on the MCX and 16.10 percent on the LME.

The escalation of geopolitical tensions between Russia and Ukraine crippled the supply chain causing aluminum prices to reach record highs in March on the LME and the MCX.

However, at present, the tables have turned, as the metal prices have corrected drastically and the base metals pack has been under constant pressure.

In June itself Aluminium prices have declined by about 9% on the MCX and over 10% on the LME. Prices have fallen to their lowest levels in seven months as a result of prolonged COVID-19-induced lockdowns in Chinese cities of Shanghai and Beijing, central banks around the world gear up for a sharp rise in interest rate, and a slowing global economy acted as the major triggers which lead to the downfall.

What happened in the first half of 2022?

Therefore, seeing at the table above, the negative triggers have outweighed the positive ones, which has caused the price of the metal to decrease in the recent months. However, it is likely that this situation will persist for the next few months, at least, until we notice any indications that things are getting better.

Overview of the Chinese economic health

Another headwind was top consumer China reported an outbreak of the Covid-19 in the city of Shanghai, post which the government immediately implemented a lockdown that lasted for weeks in response to the upsurge that has been ongoing since March.

This triggered a slowdown in the economy as factories were shut and nearly all the business activities came to a standstill. This eventually had a negative impact on the over the demand for metals.

The country's economy slowed down as a result of these prolonged lockdowns and the zero covid policy, as factories remained shut as well as shipping were delayed at the port. Country's trade figures also remained stagnant during this period.

Looking at the above chart, we can clearly see that the manufacturing PMI has slowed down in March-April and May, as Caixin PMI (based on a private survey) and NBS (official data provided by the National Bureau of Statistics) has slipped below the 50-point threshold, which denotes a contraction in the manufacturing industry. However, in the latest readings we see an improvement in the PMI numbers, as the country began to lift its lockdown measure and the businesses began to get on track.

Central Banks stance

The pandemic and the conflict between Russia and Ukraine have hampered supply chains which will eventually hurt growth and make recession difficult to avert. These supply disruptions from Covid coupled with high demand which was driven by a massive $5tn in spending by the US government fired-up the inflation on the upside. Recent data revealed that the annual inflation rate in the US unexpectedly increased to 8.6 percent in May 2022, the highest level since December 1981. It was above the market expectations of 8.3 percent.

In the chart, we see the moves in the US dollar over the same period as the rate hikes. So far, the Fed Reserve has hiked the interest rates thrice in the first 6 months in order to curb the rising inflation. The rate hikes have led to an upsurge in the price of dollar, as rate hikes typically cause the U.S. dollar to appreciate.

A stronger dollar makes the metals more expensive for buyers of other currencies.

The ECB seems poised to raise its policy rates in the Euro zone for the first time in more than ten years. While the PBOC kept its benchmark prime rate for one-year loans unchanged, however reduced rates for five-year loans by 15 basis points, in order to get the economy back on track.

Declining Inventory

The inventories at the LME registered warehouses have slipped to their lowest level in 17-years, down by a third from a month ago and nearly 60 percent down from the start of the year.

Lack of supply led to the persistent withdrawals of inventories from the LME monitored warehouse reflecting the demand from the physical markets.

However, increasing uncertainties on the macro levels have turned the table resulting to the downward pressure on prices.

Outlook:

The slowdown in the manufacturing sector in top consumer China has had a serious impact on the demand for the metals. The economy came to a standstill given the strict lockdown measures implemented by the authorities. However, as the country began to relax the Covid norms, the economy looks to getting back on track, looking at the recent PMI numbers, which has shown a sign of revival on the demand front.

However, the rising inflation and the central bank’s stance, coupled with the stronger dollar movement might be a headwind for the metals in the near term.

We expect Aluminium prices (CMP: Rs 207.15) to trade lower towards Rs 175 per kg in the coming three months.

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