Citi turning neutral on aluminium and zinc after bullish targets reached

Investing.com -- Analysts at Citi Research in a note dated Wednesday shifted to a neutral stance on aluminium and zinc in the short term, following the realization of its previously projected price levels.

This change comes on the heels of a robust rally in August, which saw aluminium and zinc prices rise significantly, aligning with Citi's optimistic near-term forecasts.

Aluminium and zinc both experienced substantial gains in August, with prices increasing by approximately 15% from their lows earlier in the month.

Aluminium prices climbed by around $320 per tonne, reaching just above Citi’s near-term target of $2,500 per tonne. Zinc similarly saw an increase of approximately $390 per tonne, trading about 5% above its near-term target of $2,800 per tonne.

Despite these gains, Citi has opted to adopt a more cautious approach in the near term. “This mirrors our cautious view on the broader LME complex following July and August volatility,” the analysts said.

Furthermore, while the market is largely pricing in a likely Federal Reserve rate cut in September, metals markets remain vulnerable to potential softening in U.S. economic data, fluctuating manufacturing sentiment, and uncertainties surrounding the upcoming U.S. presidential election.

Looking beyond the immediate term, Citi maintains a positive outlook for aluminium, anticipating renewed upside by the fourth quarter of 2024 and into early 2025.

The brokerage forecasts an average price of $2,800 per tonne in 2025, driven by expectations of a moderate cyclical recovery in global manufacturing and continued demand from decarbonization initiatives.

Additionally, aluminium is expected to benefit from sustained demand for copper-to-aluminium substitution and the delayed resumption of European smelter operations due to recent market volatility.

Citi notes that while most smelter restarts in China have been completed, the risk of supply disruptions remains, particularly from seasonal factors such as weaker hydropower availability during winter in the Yunnan region.

Moreover, the global cost curve, which has provided strong price support in recent years, is expected to continue to do so, with marginal costs likely rising to between $2,100 and $2,200 per tonne as alumina prices near multi-year highs.

Zinc's near-term outlook is more mixed, with Citi adopting a neutral-to-bearish stance due to prevailing weak steel demand sentiment and broader macroeconomic uncertainties.

However, the brokerage remains optimistic about zinc's prospects in the medium term, projecting a price of $3,100 per tonne by the first quarter of 2025.

Citi suggests that the global refined zinc market will face a deficit of 187,000 tonnes in 2024, a significant revision from the previously estimated 82,000-tonne shortfall.

This deficit is largely due to supply-side constraints, including recent pledges by Chinese smelters to reduce concentrate usage in response to shortages.

While near-term performance may be capped, Citi expects zinc prices to rebound by early 2025 as manufacturing sentiment improves. The brokerage also expects stronger mine supply growth in 2025, though this is necessary to restore market balance.

However, Citi cautions that supply ramp-ups are subject to execution risks, particularly given the zinc industry's track record of struggling to maintain global mine capacity over the past seven years.

This article first appeared in Investing.com