Aluminium Market Update: Why Are Aluminium Prices Lagging Behind Other Base Metals?

Aluminium Market Update: Why Are Aluminium Prices Lagging Behind Other Base Metals?

Base metals prices have recovered significantly since January’s lows after news that the US and China are inching closer to signing a trade deal. According to reports, both sides will lower or remove tariffs upon signing a trade agreement, but it is still unclear whether US Section 232 tariffs on steel and aluminium imports from China will stay in place. Beijing is also expected to grant foreign investors better market access in certain fields, while foreign (US) intellectual property would be awarded more protection. Regardless of the final agreement, it is evident that both sides will be able to claim a great victory and the consensus opinion among analysts is that the outcome will spur on metal prices.

This expectation explains the pressure base metals prices came under in mid-March on news that the planned meeting between Donald Trump and Xi Jinping for the signing of a trade deal will take place in late April, at the earliest. Shortly after that, base metals prices rose again with increasing backwardation after Chinese Premier Li Keqiang announced Beijing will roll out on April 1st a planned cut in value-added tax (VAT) from 16% to 13% for manufacturing industries (instead of May 1, as previously expected). This shows that metal prices are intertwined with developments in China.

But all of these developments didn’t help much the aluminium price: the cash LME price has been trading below US$ 1900/tonne since December 24, 2018, averaging US$ 1853 /t in the first two months of 2019. The aluminium price (cash, LME) rose on March 19 to over US$ 1900 /tonne (US$ 1907.5/t) for the first time since December 21, on news of a cyber-attack on Norsk Hydro.

Moreover, the aluminium price is the only commodity among base metals to trade lower on March 15, compared to December 24: US$ 1868/t  vs. US$ 1898.5/t. Copper and zinc prices were the best performers: copper price during this period grew from US$ 5931.5/t to US$ 6410/t, while zinc grew prices from US$ 2536/t – US$ 2839/t, nickel from US$10,800/t – US$ 12,845/t, lead from US$ 1976.5/t – US$ 2053.5/t and tin from US$ 19,405/t – US$ 21,340 /t.

All of these trends mean one thing: out of all base metal prices, aluminium is delinked from the pack and is charting its own path. Two further consequences are derived from this fact: firstly, the world isn’t experiencing a significant economic slowdown for now and the uncertainty and fear that pressed the markets and prices in previous months are easing. Secondly, there is no real global market deficit for aluminium, in spite of production deficits occurring ex-China.

For one, LME inventories rose recently (as did those in China), while UC Rusal is searching for a warehouse to store some 300,000 tonnes of aluminium, meaning there is no short-term shortfall of aluminium on global markets.

LME inventories

In fact, aluminium prices are driven down by China’s overcapacity and its high aluminium semis exports in the first two months of 2019. This diagnosis holds major policy implications for decisionmakers.

The graph below shows that the aluminium price is lower now than it was in 2008 (the average for that year was US$ 1898/t), even more if inflation costs are calculated for the period. This is interesting knowing that demand for aluminium in the automotive industry (and elsewhere) rose significantly for the period. And this implies the need for an urgent action by major aluminium producers to slow down capacity expansion.

performance base metals

More tools to understand aluminium prices

On March 11th, the London Metal Exchange (LME) launched seven new cash-settled futures contracts, including alumina and two aluminium premiums (US Midwest and Europe). Fastmarkets, the leading global aluminium benchmark provider, proposes to launch seven new aluminium related prices, including calcined pet coke, extrusion and flat-rolled product assessments, aiming to expand the coverage of the aluminium market from upstream to downstream. The new prices include two monthly assessments for aluminium anode grade calcined pet coke in the United States and China. Fastmarkets also proposes to start assessing aluminium 6063 extrusion conversion margins in Germany and the US, as well as 1050/5052 sheet product margins in Germany and the US and 5000 sheet margins in China, which will complement its coverage of the global aluminium supply chain.

The new indexes will help bring more visibility to the aluminium cost curve and provide a valuable tool for analysts seeking to understand the fundamentals of the aluminium market.

Aluminium billet premiums in Europe and the United States moved lower on March 15th due to continued weak demand. Italian premium dropped 4.5% w/w, while billet premiums in Germany continued to slide. Macroeconomic concerns about weaker European automobile and industrial sectors, as well as a relatively oversupplied European market remain the main forces driving billet premiums lower, with most traders expecting further fall in coming weeks (below US$ 400/tonne).

Fastmarkets’ alumina index fob Australia moved above US$ 400 per tonne and to its highest since mid-December 2018 following increased buying demand in the market and continued tight supply. The daily fob Australia alumina index rose to US$ 402.7 per tonne on Thursday March 14, up from US$ 396.92 per tonne the previous day and 3.5% higher week on week.

Lessons for the future

Some good news came from Italy, where Swiss company Sider Alloys aims to restart the Portovesme aluminium plant this year, according to a S&P Global Platts’ source. According to government figures, the plant fulfilled 80 % of the Italy’s demand for primary aluminium, including providing the metal for the country’s automotive, aerospace, construction, and packaging sectors.

Sider Alloys acquired the Portovesme smelter (Italy’s last remaining aluminium smelter) from Alcoa in February 2018 when it fell victim to the American company’s cost-cutting campaign. The new owner plans for the smelter to be fully operational by January 2021. Still, the full restart of the Portovesme plant is allegedly dependent on an agreement on energy costs – the main issue that discouraged other potential buyers when Alcoa put the plant on sale back in 2011. A number of interested companies (including Glencore) withdrew their bids when they could not obtain government guarantees for long-term subsidised energy tariffs. The government said the deal would breach EU laws.

This story is an example and a timely reminder that a big company, even a world leading aluminium producer, cannot always guarantee the success and production of a plant, as many governments wrongfully believe.

In fact, in the current market environment where most of global primary aluminium production is either subsidised and supported by governments, or protected by import tariffs (US), the deciding factor in the EU is the European Commission’s ongoing restriction on electricity subsidies and other state-driven aids for aluminium smelters.

For example, Canada announced funding for the country’s smaller steel and aluminium producers as the trade war with the US drags on. Innovation Minister Navdeep Bains said Canada will make available C$100 million (US$75 million) in “non-repayable contributions” to small- and medium-sized steel and aluminium manufacturers, or clients of those firms. The funding is aimed at projects that boost productivity or adopt new technology.

Prior to the 2009 crisis, the EU was producing more than 3 million tonnes of primary aluminium annually. Today, the EU produces just around 2 million tonnes, while its ingot imports dependency is on the rise (around 50% of total requirements are imported). Out of the 16 smelters still working, many are at risk of ceasing production. Buffeted by low aluminium prices, European smelters remain uncompetitive compared to Chinese, Canadian and US smelters.

Chinese production and exports decline

LME prices will stay weak for as long as China’s industry is not reined in. China’s primary aluminium output fell 2 % on a daily basis in the first two months of 2019 from December’s record rate, according to official data from National Bureau of Statistics, prompted by low prices that caused smelters to shut production. China produced 5.69 million tonnes of the metal in January and February, up 5 % year-on-year, according to the NBS. The NBS typically does not provide individual output numbers for those two months due to distortions created by the Chinese New Year. Chinese aluminium smelters, however, keep running throughout the week-long holiday.

The bureau’s latest production figures show the impact on smelters of persistently low Chinese aluminium prices, which are still below the average break-even level of 14,000 yuan (US$2,087.81) a tonne. Metal information service provider Shanghai Metals Market (SMM) estimates that aluminium smelters in China are making average losses of around US$100 per tonne of aluminium.

Zhang Rufeng, a manager at Baiinfo, a consultancy, estimated that 406,000 tonnes of annual aluminium production was closed in China in January and February. The remainder of the winter curbs on industrial output in northern China were slated to end on March 15. But as many industry sources argue, this year’s winter cuts have been very lax and poorly implemented.

Inventories of primary aluminium across eight consumption areas in China, including SHFE warrants, rose to 1.75 million tonnes as of March 14, up 5,000 tonnes from a week before, SMM data showed.

China’s exports of unwrought aluminium and aluminium products shrank to 343,000 tonnes in February, down 7.7% from a year earlier and the lowest since February 2017, according to data from China Customs released on March 8. Monthly exports of unwrought aluminium and aluminium semis reached a four-year high in January, at 552,000 tonnes. In the first two months of 2019, China’s exports of unwrought aluminium and aluminium products amounted to 895,000 tonnes, up 9.7% year on year.

Some aluminium extrusion, plate, and strip processors told SMM that downstream orders usually surge in March to May each year, when they would step up stockpiling raw materials. SMM expects this will occur by the end of March this year.

Final remarks

Chinese overcapacity and exports of semis are clearly responsible for pushing down aluminium prices over the past two months as base metal prices were growing. China’s recent stimulus measures are expected to show results and spur metal prices on in the second half of the year. However, aluminium prices are not expected to follow suit, and the price growth will lag the rest of complex, despite stable demand. Why? Because as soon as prices rise, Beijing will be able to restart some of the 10 million tonnes of idled capacity, as well as increase aluminium exports.

This dynamic will remain dominant on aluminium markets for years to come, and could only be broken by new governmental regulations (such as capacity restrictions or tariffs) or a surprise balancing of supply/demand. Claims by some industry participants, even some experts, that the aluminium market is already in deficit does not seem to be backed up by facts and will do little to help the price recover. On the contrary, such news will only encourage major producers in China or the Middle East to build even more capacity and wait for the price to rise before restarting production.