Citi flags the possibility of Chinese aluminium prices soaring 13% in three months, predicting the metal to take the economic lead

Citigroup Inc. or Citi, an American multinational investment bank and financial services company, stated that, with the   reopening of the Chinese economy, the demand for aluminium is expected to rise, surpassing iron-ore. The broker emphasised the numerous supply issues faced by aluminium, which analysts predict would coincide with a seasonal and reopening-driven revival in demand, leading to a considerable tightening of the physical market in China.

Citi forecasted that this would increase aluminium prices to US$2700 ($3964) per tonne for the following three months and suggested that they might reach US$3000 per tonne. These projections indicate an increase of 13 per cent and 25 per cent, respectively, above the current price of US$2388 per tonne.

Supply disruptions will worsen in the coming months after Beijing ordered aluminium smelters in southwestern China to limit output due to persistent power shortages last year. Last week, the Yunnan province of China announced another round of production cuts to stabilise the power supply, a significant centre for aluminium production. The most recent restrictions are expected to reduce the region's operating capacity to below 3.3 million tonnes.

"We previously saw iron ore as the best exposure from $US100 a tonne up to $US130 a tonne. From here, we see aluminium as the next leg of the China reopening trade," added Yao.

By the end of February, rolling power constraints in the neighbouring provinces of Guizhou and Sichuan are expected to reduce China's annualised operational capacity to less than 40 million tonnes. It would be the lowest level since March of last year when there was a shortfall of around 1 million tonnes on the world market.

Citi warned that further supply concerns from China were growing as the likelihood of the El Nio weather phenomenon recurred. The southwestern region's wet season would be postponed. As a result, increasing the likelihood that smelter restarts would be delayed or output would be reduced even further.

But compared to other commodities like copper, positioning for aluminium on the London Metal Exchange (LME) is very modest, Citi noted. As of last Friday, it had returned to levels last seen in the first quarter of 2020. Citi said that should China's economic recovery continue, aluminium may overtake copper, just like it did in 2020 when copper positioned behind aluminium by about a month throughout the rise.

Based on the new 'Global Aluminium Industry Outlook 2023' report published by AlCircle, with China removing its zero-covid regulations and recovering from the epidemic, aluminium production and demand are expected to increase globally. The demand for aluminium is anticipated to rise in the coming years, despite a gloomy short-term prognosis, as nations work to achieve energy independence and carbon neutrality targets.