Base metals prices tumbled to their lowest in several weeks at the start of August, after U.S. President Donald Trump said he would slap a 10% tariff on the remaining US$ 300 billion of Chinese imports from September 1, after no progress was achieved at the last round of talks. It’s clear that the trade war between the U.S. and China that has been clouding the global growth outlook has had a lasting negative effect on metals demand this year.
Aluminium prices hit their lowest in about a month last Friday (US$ 1749 /t cash LME) on fears of weak consumption after Chinese data showed shrinking factory activity. The grey metal has been this year’s second worst performer among base metals (after tin). Average aluminium prices for the first 7 months this year (cash, LME) was US$ 1821/t, compared to an average of US$ 2193/t for the same period last year.
Supply & demand
Global aluminium production fell by 0.5% in the first half of this year, to 31.6 million tonnes, according to the International Aluminium Institute (IAI). This is not an alarming development, but the fact is that global output hasn’t registered a year-on-year decline since the Global Financial Crisis in 2009. Chinese output fell by 3.1% in June vs. June last year, and by 0.4% over the first six months of the year, according to the IAI.
Marching to the same drum, Alcoa lowered its global demand forecast in July for the second time in three months, expecting demand growth of 1.25-2.25% this year. It is substantially down from the 4 – 4.5% seen in previous years. In this market environment, only a swift resolution of the trade dispute would lift aluminium and other base metals prices higher.
The global market remains amply supplied other than the official market deficit (“on paper”) of at least half million tonnes for the year. This is an insignificant number compared to the 3 million tonnes of Chinese exports registered in the first half of the year. Alcoa estimates the global inventory of the refined metal at 10.7 million tonnes, about half of which are considered “unreported stocks”. About 2.5 million tonnes of the supply that’s not tracked by exchanges are located in China, according Alcoa.
In the second half of the year ex-China aluminium production will increase due to the ramping up of production in Brazil’s Albras smelter. The plant has an annual capacity of 450,000 tonnes, but has been operating at 50% of that rate since April 2018 due to the reduction in output at the Alunorte alumina refinery. Norsk Hydro, which owns both plants, is now returning them to full capacity after a resolution of an environmental dispute with the Brazilian authorities. The ramp-up of the smelter is expected to be complete by the end of the third quarter.
In Canada, the 18-month long lock-out of unionised workers at the Becancour smelter has ended. Production at the plant slumped from 438,000 tonnes in 2017 to 136,000 tonnes last year, with Q2 2019 output running at an annualised rate of just 65,000 tonnes, according to Reuters. The Alcoa/Rio Tinto smelter expects to return to full capacity in the second quarter of 2020.
Global production will be reduced by some 85,000 tonnes/year after Bosnia and Herzegovina’s Aluminij Mostar smelter stopped production on July 10. The plant’s nameplate capacity is 130,000 tonnes/year while the casthouse can churn out 165,000 tones/year. There are very low chances the smelter will restart production in 2019, aside some small production at the casthouse.
Finally, Alcoa said it has reached an agreement to sell its La Coruna and Aviles plants in Spain to Swiss private equity company Parter Capital Group. This will most likely result in the restart of the smelters soon, which have a combined operating capacity of 180,000 tonnes per year. The plants were curtailed in February and maintained in restart condition.
China: summer comes early
Due to bleak market outlooks, China’s aluminium slack season has come earlier this year than last year, in spite of stimulus measures, Platts reports citing China Construction Bank and its monthly aluminium report from early July.
China’s 2019 aluminium demand growth was seen to be just 1% due to the lack of demand from the traditional sectors, according to China Nonferrous Metals Industry Association. The economic stimulus measures aimed at supporting demand growth have had almost no visible impact on demand so far. Aluminium prices in China will remain weak and are not expected to move higher before September.
China is forecast to add around 1 million tonnes/year of new aluminium capacity in 2019, on top of the current capacity of 40.8 million tonnes/year, thus adding fuel to the supply pressure, according to the state research firm Antaike.
China exported 506,000 tonnes of unwrought aluminium in June, including primary metal, alloy and semi-finished products. It is down 5.6% from May and 0.8% down from June 2018. First-half 2019 exports rose 10% from a year earlier to 2.98 million tonnes. As a point of comparison, for the first half of 2019, unwrought imports of copper were 2.27 million tonnes, down 12.5% from a year earlier, China’s customs data showed. Record high aluminium exports and much lower copper imports are best indicators of the weak manufacturing sector.
Premiums lower in the U.S. and Italy
European P1020A aluminium premiums were well supported by a lasting contango in London Metal Exchange forward price spreads at the start of August. Fastmarkets assessed the aluminium P1020A premium, in warehouse – duty paid Rotterdam, was at US$ 150-155 per tonne at the end of last week, up by US$ 5 per tonne from US$ 145-155 per tonne the week before. However, the duty-paid premium is trading slightly below the traditional 3% duty spread compared with the Rotterdam duty-unpaid premium, with weak demand and low seasonal liquidity capping a further uptrend.
The US Midwest P1020A premium hit a 16-month low in mid-July, falling to 17.75-18.25 cents per lb (US$ 391/t – US$ 402/t). Aluminium billets in the United States on August 2 traded at their lowest premium since 2017 due to weak demand, while premiums in Europe were flat in quiet trading conditions. Fastmarkets assessed the aluminium 6063 extrusion billet upcharge delivered Midwest US at 8.5-10.5 cents per lb (US$ 187/t – US$ 231/t) on August 2, its first movement in four weeks, reflecting weakness in the underlying extrusion business.
The premium for aluminium billets in Italy has fallen to its lowest in over two years due to aggressively low offers from suppliers and continued poor demand. Fastmarkets assessed the aluminium 6063 extrusion billet premium, DDP Italy (Brescia region), at US$ 330-350 per tonne on July 19, down from US$ 340-360 per tonne the previous week. This is lowest since January 20, 2017, when it was US$ 330-340 per tonne. European billet oversupply and poor demand continue to be the primary drivers pushing the market down.
Reuters poll – forecasts lower
In the latest Reuters base metals poll, conducted in mid-July, analysts have marked down this year’s forecasts for aluminium and other industrial metals prices as top consumer China struggles to revive its economy. “We expect a stabilisation of the Chinese economy rather than an acceleration, suggesting that metals demand should be sufficiently solid to support prices but not strong enough to push them higher,” said analyst Carsten Menke at Julius Baer in Zurich. Shipments from top producer China grew 10% during the first half of the year, running at an annual rate of about 6 million tonnes, and analysts expect further exports in the second half to weigh on prices.
Analysts that participated in the poll this time (25) expect the cash LME aluminium price to average US$ 1,850 a tonne in the final quarter of the year and for the whole of 2019, having marked down their forecast by 7.1% since the last poll in April. Average price forecast for 2020 is US$ 1933.4 per tonne. They also cut their forecasts for a global aluminium deficit this year to 550,000 tonnes from 868,240 tonnes in the April poll.
Alumina price down
Hydro expects its Alunorte facility in Brazil to boost alumina output to as much as 95% of capacity (6.3 m.t.) by December, from a range of 80% to 85%. Consequently, the alumina market has collapsed over the last three months with both Chinese and Western prices now at their lowest levels in two years. The CME alumina price keeps grinding lower to US$305 per tonne at the beginning of August, a level last seen in June 2017.
The shutdown of 1.5 million tonnes-per-year of alumina refining capacity in China will curb the oversupply of alumina and see prices currently languishing near two-year lows reach a bottom, research house Antaike said.
Uncertainty and a wait & see approach that prevails over the market definitely affects demand and the aluminium price. Additional pressure on aluminium prices comes from sluggish demand (the weakest in last ten years) and, at the same time, record high exports from China.
Increased trade deficits with Europe and China – this year will make U.S. tariffs on European products more likely and could weigh on trade talks with China in September. Under all these circumstances it is not likely to see aluminium prices increasing in the remaining months of the year above the US$ 1800 -1850 per tonne range.
The only optimism that remains is that it would not be the first time prices rebound unexpectedly, when there is no visible reason for that. Market uncertainty and the wait & see behaviour of players could trigger prices upwards in one moment, while higher seasonal demand and better economic data in major economies may back it up. This would be even more likely if progress occurs in US-China trade talks in September (and so preventing the new 10% tariff) and if aluminium exports from China finally start to fall (but significantly, to below 200k tonnes/month). All other scenarios are too scary to consider.