Aluminum prices continue to decline amid negative macroeconomic backdrop and insufficient growth in demand for industrial metals in China. At the same time, aluminum closed the gap, formed in early January, based on optimism for China’s reopening. Aluminum lacks support from the demand side, but the metal could receive it from reduced supply.
The authorities of Yunnan, a province in China, limited electricity consumption by aluminum plants. This restriction is imposed for the second time in six months, which could lead to a decrease in metal production by an additional 650-800 thousand tons.
This would lead to a total capacity reduction of 1.9 million tons, or one-third of Yunnan's overall aluminum output over two phases of restrictions. Some plants have already reduced production by 40%. Henan and Guizhou provinces are now experiencing difficulties with aluminum output. The first region lacks commodities, while the second one faces a shortage of hydropower.
Aluminum producers in Europe are also forced to cut production. Slovenian company Talum is likely to halt primary aluminum production in April. Back in October, Talum has already cut metal output to 20% from its maximum capacity due to a spike in energy prices. German company Speira might also cease aluminum production at its Rheinwerk plant because of high electricity prices.
Last year, primary aluminum output in Western Europe fell to 2.9 million tons, or by 12.5%. The tendency of factory downtime, which started in 2022, will continue. Therefore, plants of American Alcoa, Norwegian Norsk Hydro, Romanian Alro and Dutch Aldel are still closed.
Closing the January gap while approaching the oversold condition from the Stochastic indicator may signal a surge in aluminum prices. The first growth target will be the level of 2350.
The following trading strategy can be suggested:
Buy aluminum in the range of 2290-2310. Take profit — 2350. Stop loss — 2260.
Traders can also use Trailing stop instead of fixed Stop loss at their discretion