Aluminium Prices in Q4: Uncertainty vs. Demand
02 October 2018 by Goran Djukanovic
The aluminium LME cash price finished the month at US$ 2011/tonne after a bumpy ride, which saw it see-sawing around US$ 2000/tonne during the last three weeks. But are current levels sustainable or will we see further spikes in the price of the commodity by the end of the year? While forecasting in an uncertain market environment is never of much help, the outcome of aluminium prices will depend mostly on who will win between two opposing forces: demand and uncertainty.
Base metals prices have been under pressure during the last quarter as the U.S.-led trade war against China spurred concern that the latest occurring will derail stable economic growth in the world’s two leading economies. What’s more, the dollar rallied this year, putting additional pressure on buyers outside U.S. by making it more expensive to import industrial commodities. Metal prices were mostly weaker during the last week of September as investors closed out positions ahead of a week-long holiday in China – the Mid-Autumn Festival – starting from Oct. 1.
Aluminium stocks in LME-monitored warehouses fell below a million tonnes for the first time since March 2008 on September 26, at 999,925 tonnes. In the same week, the Chinese Ministry of Ecology and Environment announced that there would be no order by the government for shutdowns in heavy industries this winter. A number of alumina refineries, aluminium smelters and anode/carbon plants (among other heavy industries) in 28 cities in 4 provinces around capital Beijing were forced last year to cut back their production by at least 30% between mid-November and mid-March. Now, local governments are free to decide on the extent of any closures, based on regional emission levels. In general, the reasoning of the authorities is that primary aluminium and alumina producers able to meet ultra-low emission standards will be exempt from winter output cuts.
Furthermore, the original target of reducing the concentration of PM2.5 particles by 5% year-on-year this winter has been revised to a mere 3% reduction year-on-year. This is why the expectation is that Chinese aluminium and alumina production is likely to decrease insignificantly during the winter months (if any), causing additional pressure on the aluminium price to fall, if semi-aluminium products exports continue to flow out from China at current level.
According to latest published export data (for August), China sustained a surge in aluminium shipments to world markets – exports of primary aluminium and semi aluminium products amounted 517,000 tonnes, just slightly less than 520,000 tonnes it achieved in July, which was the highest total in more than three years. For three months, between June and August, exports exceeded 1.5 million tonnes, a record for a three-month period, and were up by 15 % in the first eight months of the year.
China has also been boosting exports of alumina in recent months due to ex-China supply disruptions at the world market. Outbound cargoes totalled more than 300,000 tonnes in the three months to July, from just about 11,000 tonnes in the same period last year.
A 10 % tariff was implemented on US$200 billion worth of Chinese goods on September 24, which is expected to rise to 25% in early 2019, if U.S. President Donald Trump is to be believed. China retaliated with 5-10% tariffs on US$60 billion worth of U.S. products. President Trump warned he would immediately implement tariffs on US$267 billion of Chinese goods if China responds with retaliatory tariffs.
Earlier this year, China retaliated by putting a tariff on aluminium scrap from the U.S. The 232 tariff (25% tariff on steel imports and 10% on aluminium) does not cover scrap, which has led to more scrap coming into the U.S.
UC Rusal sanctions
The U.S. Treasury on September 21 extended until November 12 a deadline for investors to divest holdings of debt, equity and other assets in sanctions-hit Russian companies EN+ Group and Rusal. The US Treasury clarified that companies can enter into new deals for UC Rusal metal for 2019; this had never been previously stated. This is hugely important for buyers of UC Rusal metal on an annual basis and for the supply and delivery of essential raw materials. The new deals, which are allowed if they are similar to last year, are contingent on further actions from the US Treasury.
The move is “a proxy of an almost-full removal of sanctions,” industry researcher Harbor Intelligence stated in a note to clients. Out of UC Rusal’s 3.7 million tonnes of production, about, in 2017, some 31% (of sales) went to Glencore via a multi-year sales contract that is expected to expire in 2019. The latest move by the Treasury allows Glencore to continue taking a stable volume from UC Rusal even if that deal expires.
UC Rusal accounted for about 12 % of all primary demand in the U.S. in 2017, according to the Aluminum Association. Aluminium buyers in the U.S. initially raced to find replacement material when the U.S. first announced sanctions against the company’s main shareholder, Oleg Deripaska, in April. While some buyers of Rusal’s aluminium have found alternative suppliers, the CRU Group estimates that Rusal’s international sales may fall by 500,000 to 800,000 tonnes in 2019. Accordingly, Rusal’s representatives at Metal Bulletin conference in Berlin in mid September asked customers if they could delay signing new supply contracts until after the U.S. mid-term elections in November.
The US Treasury has learned consequences of sanctioning UC Rusal in April so it is not realistic to repeat the same mistake, twice in a year, no matter final goal it needs to reach. The aluminium market is actually locked-in in the UC Rusal case, and is awaiting its resolution in November, after the US midterm elections (on November 6).
China production /consumption
Insofar as China is concerned, production cuts and shutdown of capacities mainly accounted for the shrinking inventories, SMM believes. Between March and August, Chinese smelters produced 18.31 million tonnes of primary aluminium, down 1.6% from the same period in 2017, according to the same consultancy. In June-September, over 770,000 tonnes of annual capacity was shut down and some smelters suspended operation to undertake maintenance. Meanwhile, consumption of aluminium held stable this year. SMM research found that China consumed 17.782 million tonnes of primary aluminium in the first half of this year, up a slight 0.9% from the same period last year.
Fitch Ratings has cut its gross domestic product (GDP) growth forecast for China next year to 6.1 % from 6.3 %. Some economists suggest growth is already well below 6 %.
Alumina price falling
Alumina prices have been falling in recent weeks, after reaching over US$640/tonne in early September. The climb-down further intensified after workers at Alcoa’s Western Australian operations agreed on September 28th to end a strike that had lasted more than six weeks. According to the new wage agreement, workers secured better job security provisions.
Alcoa had said previously that the production of alumina at the Western Australia operations had been cut by a total of about 15,000 tonnes in August. The operations normally churn out about 9 million tonnes a year, or 25,000 tonnes a day.
SMM assessments showed that prices averaged US$640/t as of September 7, as primary aluminium producers overseas stockpiled for the fourth quarter of year and this bolstered the prices. As the stockpiling wave wound down, alumina prices declined in the past fortnight and stood at US$535/t as of September 28. SMM research found that over 400,000 tonnes of alumina was ordered by buyers overseas in July-August. Data from the Customs showed that only 134,000 tonnes was exported for the same months. The gap is expected to be fulfilled in September-October.
Outlook positive, still
Aluminium prices are set to rally between 8% and 10% over the next 6-12 Months, according to Citibank. The bank expects aluminium prices to increase as the ex-China aluminium market will remain tight, while China production growth to remain “in check” amid high production costs, raw-material constraints and ample inventories. “We are moderately bullish on aluminium for 2019. It has a strong base case to gradually climb up throughout the year,” Robin Bhar, head of metals research at Société Générale, told delegates at the Metal Bulletin conference on September 13.
Why isn’t the aluminium price higher?
While global aluminium consumption has increased at rates of about 3.5-4%, production levels have stayed roughly the same (year-on-year).. The market deficit for primary aluminium is obviously compensated by recycled / secondary aluminium use. Suppliers of aluminium products to automakers, such as Novelis, Constellium or Hydro, are actually competing amongst themselves to achieve the highest percentage of recycled aluminium content in their products, in a bid to make the metal more “green”. Other than ongoing tensions with US tariffs, the increased use of recycled aluminium is the main cause why the aluminium price is not much higher than its current levels. Even aluminium premiums are not moving up, despite the fall in LME stocks, currently at around US$85-95 /tonne (duty-unpaid) in Europe. This confirms there is no lack of the metal at the market, despite a growing deficit in the primary aluminium market.
Despite the uncertainty and fear of traders, the US-China trade war does not necessarily need to affect demand for metals and aluminium. However, in the long term, this may harm both economies and increase inflation. There would be no winners in this trade conflict. Base metals are very dependent on economic parameters in China and the U.S. and therefore react sensitively to them.
In Q4, there is nothing on the horizon that could disrupt the market to such an extent that it will be reflected in significant changes in the current aluminium price levels. While the price is expected to remain around current levels and possibly increase somewhat due to seasonal demand, the alumina price will most likely continue to fall. If Alunorte refinery restarts production this year, alumina prices below US$ 400 /tonne by year’s end would not be surprising. And that would be a breath of fresh air for the loss making smelters of Europe and elsewhere.