Steel, Copper, or Aluminum: What's the Best for Your Portfolio?
Aluminum’s short-term outlook
Opinions are divided on the aluminum market balance for 2016. Goldman Sachs is bearish on base metals. It thinks that aluminum production will exceed the demand by a whopping 2.8 million metric tons in 2016. Macquarie is also projecting a surplus of 1.7 million metric tons in 2016. Harbor Intelligence expects aluminum markets to record a surplus of ~667,000 metric tons this year. However, Bank of America sees a small deficit of 7,000 metric tons in 2016.
Meanwhile, aluminum producers seem bullish on the aluminum industry’s 2016 prospects. RUSAL and Alcoa (AA) see a deficit of 1.2 million metric tons this year. However, Norsk Hydro (NHYDY) and Century Aluminum (CENX) are a lot more cautious about the aluminum industry’s 2016 outlook. In our previous series, we noted that aluminum markets could be nearly balanced this year. This should provide some support to aluminum after almost a decade of overproduction.
Price movement
Aluminum prices could fluctuate around $1,500 per metric ton in 2016. On the downside, we could see $1,350 levels while the upside might be limited above $1,650 levels. Aluminum prices reached ~$1,600 levels after falling to $1,450 per metric ton earlier this year. You can see this in the above graph.
Premiums
Physical premiums could remain in a tight range. However, premiums in the US look more stable compared to Europe. Capacity curtailments by US (DIA) producers would increase the aluminum deficit in the US markets. Capacity curtailments by US producers increased the reliance of US aluminum consumers on imports and London Metal Exchange warehouses. This demand-supply mismatch should support US aluminum premiums. However, weak aluminum premiums elsewhere would prevent US aluminum premiums from rising more.
Having said that, there seems to some divergence between what the markets are thinking and the actual mood in the aluminum industry. We’ll discuss this key aspect in the next part of the series.
You can also consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Together, Alcoa and Ball Corporation (BLL) account for 4.6% of XLB’s portfolio.
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