Experts See Arbitrage Window Widening In Post-Coronavirus China

Experts See Arbitrage Window Widening In Post-Coronavirus China

Traders in and analysts of the People’s Republic of China’s aluminium trade expressed high hopes for a strong recovery last week, noting a possible arbritrage opportunity may be in the works.

According to unnamed individuals who spoke with Reuters this week, market players expect the demand recovery to follow the coronavirus outbreak is likely to turn the situation into one where buying primary aluminium from overseas smelters will be cheaper than buying from smelters at home.

Ordinarily a country that runs a significant surplus of aluminium, China has long had little reason to import primary aluminium from abroad, as Reuters notes that last year’s imports totaled 75 thousand metric tons last year as compared to exports that totaled 35 million metric tons.

However, thanks to the late global pandemic, the tide is beginning to turn. In May Chinese buyers imported over 100 thousand metric tons of primary aluminium, with a similar (if not larger) total expected by the end of next month.

What’s more, prices between those at the London Metal Exchange and the Shanghai exchange are widening. At present, prices in Shanghai are in the neighborhood of US$1,800 per metric ton, while buyers are picking up bargains in London on aluminium that has been trending in the US$1,500 per metric ton neighborhood.

“The last time we saw anything like this was in 2009, but that was an artificial government stimulus to the industry, not natural market forces,” noted AZ China’s managing director Paul Adkins.

According to Rusal’s experts, the arbitrage created by the pricing gap could lead imports to be as high as 120 thousand metric tons next month should the post-coronavirus boom continue, with as much as one third of it originating from Russian smelters.

“We observe a situation now similar to (2009) when both benchmarks fell due to economic reasons but the pendulum swung in the favour of China first,” noted Rusal’s head of sales and marketing Roman Andryushin.

Whatever the case, the prevalent opinion is that the opportunity must be taken advantage of soon.

“The key point was near-term availability. Our customers needed to lock in the arbitrage,” noted a trading house that was too low in aluminium stock to conduct a deal.