You can’t accuse the aluminum market of being boring, which is exactly what most consumers don’t want to hear.
As buyers, we like nothing better than a nice steady predictable market. A little bit of price inflation is good if you are a stockist or trader, as it keeps the market turning over and encourages forward buying. But as consumers, most buyers would rather the market be flat and boring, the same next month as this and predictable for six months out. “Can’t think when it was last like that,” you will say.
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The problem is that the most highly traded metal on the LME and the second most highly produced metal after steel is still buffeted by squalls from every quarter. Recently, talk (and let’s remember that so far it is mostly talk) of capacity closures next winter in the greater Beijing hinterland to combat pollution has helped lift the price by encouraging talk of scarcity. Beijing has shown solid intent in this direction, already denying planning approval to 2 million tons of new capacity in China’s northwest province of Xinjiang and clamping down hard on plants elsewhere that it deems to be failing environmental standards.
The next target is said to be smelters in China’s heavily industrialized provinces of Shandong and Inner Mongolia. Of China’s total illegal aluminum capacity (which, according to some sources, is between 3.7 million metric tons and 6.6 million metric tons), the clear majority of it (up to 4.3 million metric tons) is situated in Shandong, Aluminium Insider reports.
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This means that the impact of proposed closures could be profound. While Beijing was being dismissed for environmental posturing just months ago, the market is now taking it at its word. The expectation is that we will be seeing more of the same, with further closures likely during this year. Combined with the potentially more serious closure of alumina refining and carbon anode production capacity removal of even 2-4 million tons out of China’s 31+ million metric tons annual primary smelting capacity would tighten the market, probably pushing it into outright deficit.
At the same time, among a flurry of 100-day directives emanating out of the White House, President Donald Trump is due to sign an executive order this week calling for the Department of Commerce to accelerate the investigation on aluminum imports in the name of national security. The allegation is that damage to the U.S. aluminum industry from imports, particularly overproduction in China driving down global prices, has implications for national security. A positive ruling on this could result in tariffs or other restrictions against the estimated 55% of current US supply that is met by imports.
Both developments could be supportive of higher prices this year. In fact, when you look at the aluminum market, set against a backdrop of solid global growth and continued above GDP growth in the use of aluminum, you must ask where negative price pressures are to come from.
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One could be a more rapid appreciation of the U.S. dollar. A stronger dollar usually has a negative impact on commodity prices, but the market is already factoring in three Fed rate rises this year, and potentially inflationary tax changes proposed by the new administration are at least a year away from implementation. Short-term profit taking aside the only medium-term cap could be a psychological one of $2,000 per ton. But once breached, that becomes a support level for further rises.
It will certainly be an interesting year for aluminum.