Is Goldman Sachs Too Bullish on Aluminum?

Goldman Sachs has set pretty optimistic forecasts on aluminum prices. According to a recent report from CNBC, the bank expects prices to hit $2,000 per metric ton in six months and $2,100 per ton within a year.

I’ve also been pretty bullish on aluminum since last year. Similar to what we saw in the steel industry, China put cutting aluminum capacity on the top of its agenda as the country takes air pollution seriously. In addition to supply cuts promises, China’s economic numbers were running strong at that time. However, just recently, our commodity outlook is moving from bullish to bearish, and being bullish on aluminum while commodity markets weaken is a very hard sell. Here are some reasons why Goldman Sachs might need to adjust its aluminum outlook.

Aluminum Output Up

Goldman expects aluminum to be the next target of supply-side reform in China. The bank expects aluminum to be the new steel this year. Sentiment in steel markets got a boost on Beijing’s announcements to cut steel capacity. But as time goes on, markets are starting to realize that capacity cuts don’t mean lower output, at least in China.

According to the latest data, for the first four months of 2017, aluminum output in China rose 12% compared to the same period last year. Chinese aluminum semi-fabricated exports jumped in April to the highest level since November 2015. For the first four months, exports are up 2%. Given these numbers, we now suspect that the announced capacity cuts will only serve to make China’s aluminum industry cleaner, but not leaner.

　Potential Slowdown in China’s Demand

Robust demand from China helped push prices higher last year, but investors now anticipate a downturn in the Chinese economy in the second half.

In May, China announced intentions to halt credit growth, limiting lending for the construction of infrastructure projects, which could potentially hurt demand for industrial metals like aluminum.

In addition, some of April’s economic numbers disappointed. The auto market, a big aluminum consumer, is showing signs of a slowdown. Total vehicle sales were 2.2% lower compared to April 2016. Lower sales-tax incentives aren’t attracting buyers as much as they did last year. Despite the decline in April, Chinese car sales rose 4.6% for the first four months of the year. It’s still decent growth, but it’s nothing compared to what we saw last year. Meanwhile, China’s Caixin Manufacturing PMI came at 50.3 in April, the lowest reading since September 2016.

Slump in Raw Material Prices

Falling raw material prices widen the margins of aluminum producers, making them more resistant to cut output. China’s energy-intensive aluminum smelters receive nearly 90% of their energy needs from coal. Coking coal prices plunged again in May, dropping from $300 to $200 per metric ton. Alumina prices also took a hit in May, falling 10% from this year’s peak. Declines in these markets signal trouble for aluminum markets ahead.

　What This Means For Metal Buyers

Aluminum is outperforming the rest of the industrial metals this year. However, if the expected capacity cuts don’t translate into lower output and China’s demand continues to show signs of a slowdown, we might not see aluminum trading above $2,000 per metric ton this year.