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Is $3,000 aluminum price just the start? Analysts bullish as metal faces supply crunch

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(Kitco News) - With gold prices struggling to find any direction around $1,800, attention is turning to the aluminum market as speculative momentum has helped push prices to $3,000 per tonne on the London Metals Exchange.

Although prices are down from their multi-year highs, they remain elevated. Aluminum on the LME last traded at $2,899.50 per tonne. Some analysts expect that this is just the start of a more significant rally. Analysts at Citi said that they could see prices rising to $3,100 per tone in the next 12 months as they expect to see lower Chinese production create a 1.1 million tonne deficit in the market for 2021.

Growing global economic growth concerns have generated headwinds for many commodities; however, the aluminum market has been able to buck that trend. Many analysts note that a growing supply crunch is driving aluminum prices.

In a report, Wednesday, Daniel Briesemann, base metals analyst at Commerzbank, noted that while Chinese aluminum output is marginally higher so far this year, at 3.16 million tonnes, the nation has seen falling production four the last four consecutive months.

Analysts at Bank of America noted that falling supplies had pushed global inventories of aluminum to the lower end of long-term trends.

"Production in China and World ex-China may be up YoY, but there have been virtually no sequential increases YTD. China's smelters, in particular, have faced a series of headwinds over electricity feed," the analysts said.

The Bank of America analysts reaffirmed their bullish outlook on aluminum because of "structural supply issues;" however, they added that the price could be moving too high too fast, and there is a growing risk of a sharp pullback.

Commodity analysts at TD Securities are also bullish on the base metal noting the market's growing supply crunch.

"The aluminum supply chain has been ravaged by an unforgiving series of disruptions, which created asymmetries in price action that have helped propel prices towards decade highs," the analysts said.

TDS said that they see aluminum as an outperformer in the base metal sector, with prices surpassing $3,000.

"With Chinese output significantly curtailed, imports of primary metal could eventually become a more recurring feature of the global market. These disruptions should continue to create a source of idiosyncratic returns in aluminum," they said.

However, not all analysts are optimistic that aluminum can maintain its current uptrend. Mike McGlone, senior commodity analyst at Bloomberg Intelligence, said that the base metal is too hot and sees more potential in the gold market.

"At a ratio of about 0.64, the per-ounce price of gold vs. a ton of aluminum has dipped to a good support zone, favoring the precious metal over its industrial counterpart," he said in a report Wednesday. "Unlike the precious metal, which is about 15% from its peak, the recent price spurt in the industrial metal makes it more subject to excess supply and inventory reentering the market."
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