Aluminum

This week, most exchange-traded metal prices came down to Earth as the Federal Reserve hinted it may finally increase interest rates. The hardest hit was copper, which hit a two-month London Metal Exchange low. Weaker Chinese imports over the past few months and the bearish calls of some major banks have exacerbated copper’s recent price fall.

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When construction is strong in, China copper imports surge… but with them falling? It doesn’t look like demand in the world’s largest consumer is keeping up. Copper is just one of many metals that would be affected by interest rate increases and more hawkish behavior from the Fed, in general, but unlike other non-ferrous metals whose prices have increased on the LME this year — such as zinc and tin — copper has not shown strong demand and generally falling supply. Copper never was fundamentally strong even when its price jumped in Q2.

Trump Trumpets Trade

Politics met metals this week as Republican Presidential Nominee Donald Trump became the first candidate for President to promise to label China a currency manipulator and take action at the World Trade Organization accordingly.  He also promised to instruct the office of the U.S. Trade Representative to bring more trade cases against China. You’d think he’d be nicer to the country that used to make his ties.

Let’s Exchange, No Spoofs!

The London Metal Exchange and CME Group made headlines this week as the former cut fees in half this month as an apology for moving its live “ring” (where traders make deals using hand gestures on big red couches) trading to a backup location after structural problems were discovered at its brand new London office. As for CME Group, it cracked down on a rogue trader, suspending him for at least 60 days, for “spoofing.” Spoofing is the practice of setting up electronic trades to create demand only to pull out of them at the last minute.

India Hates Steel Dumping, Too

India joined the U.S. and E.U. this week in placing tariffs on cheap imports of hot-rolled and cold-rolled flat steel. Although six countries saw their imports to the world’s largest democracy tariffed, China was, again, the main dumping culprit.

Aluminum Association: Let’s Make a Deal

Speaking of China, not only does the Aluminum Association — North America’s largest trade association of primary smelters — still want a bilateral trade deal with China to set up rules for imports from the People’s Republic, but it signaled this week that it would pursue tariffs similar to those steel has won against Chinese importers if it can’t get the deal it wants for its producer members.

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The AA may even ask the International Trade Commission to reclassify some imports of “semi-finished” product to make them subject to existing taxes.

reuters_LME_Aluminum_support)82316_550

Source: Reuters.

LME aluminum has found its support level.

The Aluminum Association has not given up on the U.S. reaching a binding bilateral deal with China to reduce aluminum overcapacity, but the group is also holding out the option of pursuing anti-dumping or countervailing duty cases if market conditions fail to improve.

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The aluminum industry is gearing up for a Sept. 29 International Trade Commission hearing, which would serve as the first step in any future trade defense cases on aluminum. The industry has taken a less aggressive approach than steel in not more pursuing anti-dumping, countervailing duties or World Trade Organization action against China on aluminum, opting instead to try to reach a bilateral or multilateral deal, Aluminum Association Vice President of Policy Chuck Johnson told World Trade Online.

“The issues of overcapacity really came to a head in the middle of last year,” Johnson said. “Prior to that, we had not been active on this issue. We have not, as an association, pursued antidumping and other trade enforcement remedies for our industry as have steel and other industries that have been facing a more endemic and long-term conditions. … But we are not taking anything off the table.”

This is a shift for the association, which represents original aluminum manufacturers throughout North America.

The ITC hearing will look at Chinese trade practices including trade policies, export duties and industry subsidization. The goal, Johnson said, is to get better documentation on China’s industry than has previously been gathered.

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The ITC is currently collecting information and gathering public comments in preparation for the hearing. The commission is also circulating a questionnaire looking at the competitive conditions affecting the U.S. aluminum industry as a whole.

28 Ambassadors to the U.S. have been asked by the chairman of the U.S. International Trade Commission to testify or submit comments on global aluminum trade and the U.S. industry as the ITC continues its work on a report on those topics for the House Ways & Means Committee.

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The 28 ambassadors hail from Australia, Brazil, China, France, Iceland, Italy, Korea, Bahrain, Canada, European Union, Germany, India, Japan, Kuwait, Malaysia, Mozambique, Norway, Qatar, Saudi Arabia, Turkey, Great Britain and Northern Ireland, Mexico, Netherlands, Oman, Russia, South Africa, United Arab Emirates and Vietnam.

As a counterbalance to our article this week about proposed tariff changes intended to counter the flow of unwrought metal out of China, China Hongqiao, the world’s largest aluminum producer, is reported in the South China Morning Post rejecting concerns the Chinese aluminum industry has a major overcapacity problem.

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In fact, in the words of Chief Executive Officer Zhang Bo, China’s high demand for aluminum and improving “self-discipline” in production and capacity expansion has already resulted in a much healthier state than some analysts’ believe. As in steel — and several other commodities — China’s position in the global aluminum market cannot be overstated, but unlike steel an export regime is supposed to keep excess production from being exported onto the world market.

China’s Aluminum Demand and Supply

Broadly speaking, up to a couple of years ago that held good. China accounts for some 53% of global demand of 30 million metric tons in the first half of this year and is self sufficient in primary aluminum although it does import bauxite and alumina, intermediate products.

How are Chinese smelters making money? Source: Adobe Stock/Pavel Losevsky

How much excess aluminum is being produced by Chinese Smelters? Source: Adobe Stock/Pavel Losevsky.

Zhang Bo says given that the industry’s (in China) overall plant utilization exceeds 80%, and over 80% of the smelters are profitable, “nobody should have the idea that the industry is in major overcapacity.”

He also noted mainland China’s 8.6% year-on-year first-half aluminum demand growth has far outstripped output growth of just 1% with robust demand from the transportation, electronic and electrical markets this year. To be fair, China Hongqiao figures appear — on the face of it — to support his position. On Friday the group posted a 20.7% year-on-year rise in net profit for the first half to $510 million (3.28 billion CNY) as a 9% fall in selling prices was more than offset by a 25% growth in sales volume the article stated.

Nor is China Hongqiao an exception. The industry’s daily output volume has surged from a low of around 75,000 mt early this year to 90,000 mt now, not far short of last year’s highest levels, ANZ Senior Commodity Strategist Daniel Hynes is quoted as saying.

Earlier promises of smelter closures when prices were around $1,599/mt (10,600 CNY per mt) are now a distant memory, as prices have surged to $1,885.95/mt (12,500 CNY) today gradually idled capacity is being brought back into production. Nearly 200,000 mt of annual capacity having resumed in the second quarter and another 300,000 mt is due to come back in the third quarter, according to the SCMP.

Smelting Capacity Expands

Earlier targets to cut 4.5 million mt of outdated aluminum capacity, even if implemented, will be rapidly replaced by some 3.7 mmt-a-year of new capacity scheduled to come onstream in the second half of this year alone. China Hongqiao expanded its annual aluminum smelting capacity by 29.8% to 5.89 mmt in the 12 months to June 30, and Zhang expects it to reach 6.5 mmt by year-end.

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China Hongqiao will, of course, talk up the market and downplay suggestions of excess production. The company’s share price has done well on a resurgent aluminum price and rising profits, the last thing Zhang Bo wants is talk of overcapacity.

China’s aluminum semis exports have reduced a little this year, suggesting domestic demand is robust and mills do not have such a pressing need to dump metal abroad as they did last year. Still, with such a dominant position in the global aluminum market a sneeze at home could easily result in a cold for smelters in the rest of the world.

I think it’s called the law of unintended consequences and it goes something like this: Government can take action or make a rule for the best possible reason but, sometimes as a result, there are unintended consequences that make the original decision seem stupid.

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So is the case with China’s export rebate scheme, the original rebate of tax on export of value-added products had a certain logic to it. China is not a low-cost producer of power and to support all exports of energy-intensive metals such as aluminum was a senseless act, while supporting exports of higher value alloys and forms had a certain logic for a country looking to develop its indigenous technology and capability to supply a rapidly growing domestic and regional market.

Subsidizing Exports

Supporting exports of unwrought metal, it was deemed, was tantamount to subsidizing the export of energy as a third of the cost of unwrought aluminum is made up simply of electricity costs, so exports of unwrought metal incur a 15% export duty whereas exports of value-added categories attract up to a 13% rebate of VAT costs. So, China split its subsidies scheme based on the harmonized tariff system supporting products falling in the value-added categories but not the basic 76.01 Unwrought Aluminum category of material suitable only for re-melting. Read more

U.S. trade authorities are considering asking for a reclassification of aluminum products in the wake of China’s exports of aluminum semi-finished products. Architecture billings in the U.S. were still up in July.

Semi-Finished Aluminum

The U.S. is consulting other governments on proposed changes it has drafted to the Harmonized Tariff Schedule (HTS) meant to stop a flood of “fake semi-finished” aluminum products entering the global market, almost always from China, that evade export duties while simultaneously qualifying for Chinese export subsidies.

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Aluminum industry and Customs and Border Protection sources told World Trade Online the U.S. proposal, still in draft form, would reclassify semi-finished products shipped specifically for remelting as unwrought, or raw aluminum. Semi-finished products are usually an aluminum alloy that are used for further manufacturing, but the fake semi-finished products are almost pure aluminum and cannot be used for any other purpose than remelting.

Charles Johnson, vice president of policy at the Aluminum Association, said a common fake semi-finished product exported from China is labeled for customs purposes as aluminum alloy coils, which are used for airplane wings, auto bodies, roofing and aluminum cans. The coils are sold – among other items – under HTS headers 76.06, which evades China’s 15% export duty imposed on unwrought aluminum and makes the product eligible for export subsidies that start as low as 13%.

Architecture Billings Up Again, Pace of Increase Slows

The Architecture Billings Index was positive in July for the sixth consecutive month, and 10th out of the last 12 months as demand across all project types continued to increase. An economic indicator of construction activity, the ABI reflects the approximate nine to 12 month lead time between architecture billings and construction spending.

Free Download: The August 2016 MMI Report

The American Institute of Architects (AIA) reported the July ABI score was 51.5, down from the mark of 52.6 in the previous month. This score still reflects an increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 57.5, down from a reading of 58.6 the previous month.

One of the causes of falling aluminum prices over the past few years was the rise in China’s aluminum exports. But Chinese exports started to calm down this year, helping aluminum prices to recover.

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China exported 390,000 metric tons of unwrought aluminum in July, down 9.3% from July of last year. Chinese aluminum exports have fallen around 7% for the first seven months of 2016. Lower Chinese aluminum exports suggest stronger aluminum demand in China coupled with some supply cuts.

According to the latest figures released by the International Aluminum Institute (IAI), Chinese aluminum production has now fallen on a year-over-year basis in five out of the last six months. For the first half, Chinese aluminum production has fallen by 3.3% compared to the same period last year. This will be the first year where Chinese annual aluminum output declines if Chinese smelters don’t restart idled capacity. But, will they?

US Producers Warning Of Higher Chinese Supply in H2

During their second quarter earnings calls, some U.S. producers pointed to higher Chinese supply as one of the biggest risk for the aluminum industry in the second half. Century Aluminum believes that aluminum production in China could increase in the high single digits in 2016. For that to happen, we would need to see a sharp increase in China’s aluminum output in the coming months. Norsk Hydro also expects some of the Chinese capacity to come back later this year.

Prices: Not Too High But Rising Steadily

3M aluminum LME rising this year. Source: MetalMiner analysis of Fastmarkets data

Three-month aluminum LME price rising this year. Source: MetalMiner analysis of Fastmarkets data.

The ongoing fall in Chinese exports and a good-looking demand picture thanks to Chinese government stimulus are supporting aluminum prices this year. Unlike other metals, aluminum prices haven’t really skyrocketed but they are drawing a nice uptrend this year, signaling that investors’ sentiment on the metal is improving. If China doesn’t restart capacity, we could continue to see prices climbing higher.

We rarely see such positive growth in metal prices as we did in the August MMI Price Trends Report.

MM-IndX_TRENDS_Chart_August2016_FNL-TOPVALUE100

All the metals we track were up save for Aluminum, which fell only 1.3%, and renewables and rare earths, which held flat. The Stainless Steel MMI increased 9% amid uncertainty about Chinese nickel ore supply after mining crackdowns in top supplier, the Philippines.

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Meanwhile, the most bullish of bull runs continued for our Global Precious MMI which added a 7.2% increase to its jump last month to knock on the door of the top 10% of the IndX. The platinum group metals had strong increases along with gold and silver this month.

Wall Street Bull

“Hey metal buyers, remember me?” Wall Street bull courtesy of iStock.

Palladium, particularly, made higher highs and stumbled to lower lows in classic bull market fashion.

So buy quickly before prices increase more, right? Wrong. Our Raw Steels MMI posted a healthy 4% increase, but it’s still heavily dependent on China’s stimulus programs to keep demand up in the largest global consumer of steel products. If there is a pullback in stimulus, prices could fall dramatically. The same is true for copper.

Unlike diamonds, bullish trends in commodities and industrial metals don’t last forever. Continue to make informed buying decisions in this thriving market — watch China’s stimulus program and the strength of the U.S. dollar post- Brexit — and remember that today’s price strength might be tomorrow’s carpet getting pulled out from under your feet.

Our Aluminum MMI fell by one point for the month as investors seemed unwilling to chase prices much above $1,600 per metric ton.

Surplus or Deficit?

There is still a divided opinion over weather aluminum is in a surplus or a deficit this year. On one side, is the opinion that China hasn’t cut enough capacity and that its smelters are planning to increase output after a modest recovery in prices this year. Meanwhile, many others believe that aluminum markets will record their first deficit year in a decade.

Aluminum_Chart_august_2016_FNL

According to the latest figures released by the International Aluminum Institute (IAI), Chinese aluminum production has now fallen on a year-over-yeqars basis in five out of the last six months. For the first half, Chinese aluminum production has fallen by 3.3% compared to the same period last year. If things continue like this, this will be the first year where Chinese annual aluminum output declines.

Rising Aluminum Demand

While production is likely to fall this year, unless Chinese smelters decide to ramp up production, demand is also looking pretty good. Real state indicators in China for the first half are much better than last year. Also China’s car sales continued to climb in June, up 18% from June of 2015. Finally, the Caixin Manufacturing PMI in China rose above 50 points for the first time since February 2015.

Looking at the Chinese aluminum demand indicators, aluminum’s demand could grow in the ballpark of 5-6%, as most aluminum producers are projecting, especially if China continues to provide stimulus in the second half.

Compare Prices With The July 2016 MMI Report

So, for the first half of the year, China’s aluminum demand rose while production fell. This is also being reflected in exports this year. China’s aluminum exports rose by 10% y-o-y in 2015. However, for the first half of 2016, exports have fallen by more than 9%. Falling aluminum exports are a welcome sign for U.S. aluminum producers.

Midest Premiums Fall

For aluminum buyers, the all-in aluminum price consists of the aluminum price plus regional aluminum premiums. U.S. Midwest premiums fell slightly in July, with current quotes of $0.07 per pound. The picture doesn’t look any better in Europe where physical premiums are near their all-time lows.

The ongoing weakness in premiums this year might look surprising, given falling exports and a projected deficit this year. Some analysts attribute this weakness to the current flow of aluminum from non-LME-registered warehouses to physical markets.

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