Aluminum prices are the key driver of aluminum producers’ (RIO) (NHYDY) earnings. Although shipments and cost control initiatives often impact earnings, the biggest impact generally comes from commodity prices (DBC).
Aluminum has outperformed both copper and zinc in 2017. The lightweight metal has built on last year’s gains. As of May 23, aluminum has risen ~14.0% this year. This rise was preceded by a 13.4% rise in 2016. Although aluminum has shown strength in 2017, prices didn’t breach the psychologically $2,000 price level. Notably, aluminum (AA) (CENX) hasn’t traded above $2,000 per metric ton since November 2014.
Goldman Sachs held a bearish view on base metals until about six months ago. In 1Q16, Goldman Sachs said that it expects aluminum prices to fall to $1,350 per metric ton. The brokerage firm was also bearish on copper. In August 2016, Goldman Sachs warned of a “supply storm” in copper. Goldman Sachs said that it expects copper prices to fall to $4,000 per metric ton.
However, Goldman Sachs turned bullish on base metals. In a client note, Goldman Sachs analysts wrote that “Goldman expects aluminum prices to hit $2,000 per metric ton in six months and $2,100 per ton in 12 months.”
Currently, aluminum prices are in the ballpark of $1,950 per metric ton. Can aluminum continue its good run and break the shackles of $2,000 per metric ton? To answer this question, we’ll have to look at the underlying demand-supply equation as well as market sentiments.
Let’s start by looking at the recent trend in Chinese aluminum production.