Non-ferrous Metals

In honor of Throwback Tuesday, we are revisiting MetalMiner’s Top 50 posts with an eye toward illuminating what’s happening in metals today. #TBT This post, originally published Feb. 26, 2009, about the production of primary aluminum, is as relevant to the LME’s new aluminum contracts as it was to explaining aluminum’s price drop at the time.

Since the aluminum price on the LME dropped below $1500/ton, it has been repeatedly stated that some 60-70% of aluminum smelters are losing money.

What goes into producing aluminum? Source: Adobe Stock/Pavel Losevsky

What goes into producing aluminum? Source: Adobe Stock/Pavel Losevsky.

Electricity alone is generally accepted as representing about a third of the cost of aluminum ingot, although at what sales price that metric is judged is open to debate. We thought it would be interesting to explore what the true costs of production are for a ton of primary aluminum and thereby test to what extent the smelters’ claims that they are losing money are correct.

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As with the steel industry, many of the industry’s woes may have as much to do with low plant capacity utilization as they do with low sales prices.

How Much Does it Cost to Produce One Ton of Aluminum?

Although the newest smelters can be closer to 12,500 kWh per ton, let’s say most smelters are consuming electricity at 14,500-15,000 kWh/ton of ingot produced. With the LME at $1,300/metric ton, that means electricity should be costing a typical smelter $0.029/kWh.

Needless to say, smelters are rather coy about their power cost contracts so it’s hard to verify how prevalent this number is though many smelters are on variable power cost contracts with their electricity suppliers such that the power generators are paid a fixed percentage of the world ingot price. If we take that as one-third, then it’s not only smelters that are losing money – many power generators must be, too.

When US national average industrial and commercial electricity consumers are paying $0.0706/kWh and $0.1013/kWh, respectively, according to the Energy Information Administration, to be selling power to smelters at $0.029/kWh represents a huge subsidy. In reality, power costs to the smaller US smelters are probably higher than this and explains why many have been cut back or idled, but interestingly the same source gives specific power costs for the Pacific Northwest of only two-thirds the national average, suggesting that many NW smelters may indeed still be getting power at ingot-price-related levels.

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The monthly Aluminum MMI® registered a value of 76 in October, a decrease of 1.3% from 77 in September.

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Aluminum prices were more stable in September, only falling slightly from the previous month. This price stabilization is normal after 4 consecutive months of declines. Upside momentum is still lacking and it seems like the bears are firmly in control of this market. The aluminum trend keeps pointing down with no sign of a turnaround.

Aluminum_Chart_October-2015_FNLChina is Still Overproducing

The Aluminum Association expressed strong concern when the China Non-Ferrous Metal Industry Association (CNIA) called for the removal of a longstanding 15% tax on exported primary aluminum. This would increase the margins of Chinese exporters, potentially exporting more aluminum to international markets. Even with the tax in place, some in the US believe that aluminum producers in China are illegally mislabeling extruded products as semi-finished to avoid exports on billet.

Aluminum exports are up 22% on the year-to-date. Exports dropped over the past 2 months but production still looks high in China, so the drop in exports likely relates more to weaker global demand. Some analysts are waiting for a rebound in exports when final reports from last month come out.

Another interesting highlight of September was that Alcoa, Inc. will split itself into 2 companies. The firm has found that its legacy smelting business, the company’s vertically integrated structure, is not the advantage it once was.

One half retains the Alcoa name and comprises the legacy business of bauxite mining, alumina production and primary aluminum smelting. The second half of the business, or the “value add” business, is yet to be named, although it’s believed to include much of Alcoa’s specialty aluminum business and recent acquisitions such as titanium fabricator RTI.

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Two months ago we mentioned the slide in Alcoa shares. Even though the company made good acquisitions and investment in downstream value-added activities, its stock couldn’t buck the falling trend in aluminum prices. On top of that, premiums fell in September below $0.07/lb for the first time since January 2012, hurting the margins of Alcoa and the rest of the US aluminum producers.

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Everybody loves to hate a big bank. And everybody loves to hate a bank that ‘manipulates metals markets.’ The ridiculously slow aluminum load-out schemes, inflated Midwest premium prices (even in a world awash with the light metal) and the “speculation” that has become a regular part of the industrial buyers’ daily routine have all created discontent among the masses.

Whether the Goldman-Sachs and JPMorgans of the world have done anything illegal, we can’t say – after all, the Federal Reserve said it “is reviewing a 2003 regulatory decision that allowed Wall Street investment banks to enter into the commodities business.” Perhaps that’s a follow-on to the dismantling of the Glass-Steagall Act.

Has this one regulatory decision caused commodity volatility? That’s for another post, though certainly it has likely caused some of the volatility. (China demand, the market herd effect, supply shortages and interest rates likely play a much larger role than this one regulatory decision.) So when the Commodity Futures Trading Commission (CFTC) decided to send letters ordering the key players to retain emails, documents, etc., an investigation may come in the near future.

“Okay, so what?” you say…

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Despite the current sluggishness in the non-ferrous metals markets, India’s Aditya Birla Group has some pretty big plans for the aluminum and copper sectors. To begin with, the Group’s flagship company, Hindalco, also India’s largest non-ferrous metals producer, has made some headway by raising funds for its biggest greenfield project so far. The Aditya Alumina and Aluminum project in the Indian State of Odisha, seeks to raise approximately US $1.65 billion to compete with other majors in this field, particularly Vedanta.

While Hindalco, a Fortune 500 company, goes about its expansion plans, its subsidiary, Novelis, a global leader in aluminum rolled products and aluminum cans recycling, has also announced massive investments plans worth US $ 1 billion to mark its presence in growth markets such as Korea, China, Brazil and India.

Novelis also announced that it had completed the sale of three European aluminum foil and packaging plants to Eurofoil, a unit of American Industrial Acquisition Corporation (AIAC). The transaction includes foil rolling operations in Rugles, France; Dudelange, Luxembourg and Berlin in Germany, which will now operate, respectively, as Eurofoil France S.A.S., Eurofoil Luxembourg S.A., and Eurofoil Paper Coating GmbH. Read more

For all metals that comprise the MetalMiner Copper MMI®, Chinese bright copper scrap had the largest decline on June 28, 2012, dropping 4.1 percent. However, some semi-finished products showed price support. For example, the price of Chinese copper wire rose 0.4 after a two-day drop. The price of Chinese copper bar increased 0.4 percent. The cash price of Chinese copper increased 0.4 percent.

The price of US copper producer grade 122 inched up 0.8 percent. The price of US copper producer grade 110 rose 0.8 percent. The price of US copper producer grade 102 rose 0.7 percent . The cash price of primary Japanese copper saw little movement.

Following a couple days of improvement, the copper 3-month price weakened by 0.1 percent on the LME. Prices closed at $7,335 per metric ton. The primary copper cash price remained essentially flat on the LME at $7,353 per metric ton.

The week’s biggest mover on the weekly Automotive MMI® was US palladium bar, which saw a 6.9 percent decline to $571.00 per ounce. For the third week in a row, the price of US platinum bar dropped, falling 4.1 percent to $1,392 per ounce.

The price of US HDG fell 2.2 percent over the past week as well. This was the third week in a row of declining prices despite a still-growing aluminum sector when compared to last year.

The copper 3-month price fell 2.9 percent on the LME to $7,335 per metric ton after rising 1.9 percent the week before. Following a 2.3 percent increase in the week prior, the primary copper cash price fell 2.8 percent on the LME last week to $7,353 per metric ton. The Chinese lead price closed down last week with a 2.5 percent drop. Korean 5052 coil premium over 1050 sheet remained essentially flat from the previous week.

Note: The MetalMiner monthly MMI series will be first released on July 2, via MetalMiner IndX and subsequently over the course of the week of July 2.

The Automotive MMI® collects and weights 7 metal price points used in automotive production to provide a unique view into automotive metal trends. For more information on the Automotive MMI®, how it’s calculated or how your company can use the index, please drop us a note at: info (at) agmetalminer (dot) com.

Have you every wondered what those practicing the dark arts of arbitrage are up to? It’s an often-used phrase but not many of us have actually bumped into someone who owns up to be an arbitrager. In plain terms an arbitrager seeks to take advantage of disparities between two markets that historically have shown a close correlation. So for example New York Comex copper and London LME copper prices would normally move in close correlation. If they get out of sync arbitragers will sell one and buy the other in the expectation they will return to equivalence. Well markets like New York and London copper move so closely that the margins remain thin. Playing such differences as appear in such a highly liquid market provide limited opportunities so these clever chaps have long since moved onto more lucrative arenas. The objective remains the same but seeing the differences as they develop and being able to match them to a historical norm takes a little more insight.

MetalMiner has developed a pretty clever index based on hundreds of price points around the world, updated daily and reporting metals prices impacting a wide spectrum of industries. Curiosity got the better of me this morning and playing with LME base metals prices during the month of June I ran a correlation with Chinese domestic base metals prices over the same period fully expecting a close correlation within fractions of a percent. Surprisingly this was not the case. While base metals everywhere have come off in the month of June they have come off more on the LME than they have in China. For example aluminum fell 4.26% in RMB from June 1 to June 27 but the LME fell 8.05% during the same period. Zinc fell 3.30% in China compared to 5.79% on the LME, whereas tin fell 3.24% compared to 5.93%. The largest disparity involved lead, which fell only 3.14% in China but 8.20% on the LME.

Aah you say, maybe exchange rates are to blame? Good point, I thought of that too, but converting RMB prices to USD at the rate prevailing on the day of reporting shows aluminum prices in dollar terms dropped 4.17% rather than the 4.26% above, a miniscule difference.

Grounds here for arbitrage wizards to track the correlation and exploit divergences? Probably, maybe they are already at it, but more to the point access to such data allows metals consumers in the US to track the raw material costs of their Chinese suppliers (and the IndX doesn’t only track Chinese prices of course) and either take avoiding action if local price trends start moving against them or advantage if price trends move in their favor. Knowledge is power the saying goes. Well hasn’t that always been the case in the metals markets?

For aluminum market observers, 2012 has brought some interesting dynamics. Take for example prices – LME prices have hit a two-year low, while Midwest premiums have hit a high. Meanwhile China prices remain comparatively high. At the same time, lead times from LME warehouses continue to grow and have exceeded 12 months! At this year’s Harbor Aluminum conference, participants gained a much deeper understanding and appreciation for what drives aluminum markets. That has more to do with the careful skill and moderation of the program by a deep subject matter expert, Jorge Vazquez and his team of knowledgeable analysts.

So now, three weeks post-event, we wanted to share with MetalMiner readers what conference participants, after hearing from both analysts as well as a variety of pundits and producers say is driving some of these highs and lows. Participants answered a broad range of questions posed by Harbor and MetalMiner has re-posted a few of these.

On market speculation

Do you think speculative flows play a role in the determination of long term prices?

  • Yes a bit 42%
  • Yes, significantly 47%
  • Not really 11%


After this session, I believe we will see aluminum capacity curtailments accelerate:

  • In East/Central China 21%
  • North America 9%
  • West Europe 26%
  • Oceania 10%
  • All of the above 33%

Raw material short supply

Which raw materials are you most concerned about sourcing in 2013?

  • Energy 20%
  • Aluminum 31%
  • Alloying agents – magnesium, silicon, manganese 9%
  • Aluminum scrap 26%
  • All of the above 14%

What’s driving Midwest premiums?

In your opinion what do you think is the greatest driver behind the current record levels in aluminum Midwest Premiums?

  • Physical demand 16%
  • Financing deals 19%
  • Market manipulation by a small group of traders 36%
  • Long queues 23%
  • Freight 7%

We will continue to cover aluminum market developments. Harbor Aluminum Intelligence provides daily market research and commentary. You can learn more about Harbor Aluminum here.

Prices for Grain Oriented Electrical Steel (GOES) fell slightly (1 percent) from the previous month, with the index slipping from 253 to 250.

The GOES MMI® does not appear to follow the same pricing patterns taken by last month’s biggest MMI dippers such as the Copper MMI® and  the Stainless MMI®. That may have something to do with activity within the power construction market which, according to an earlier analysis on MetalMiner, drives GOES pricing, along with supply of raw materials:

GOES MMI® and US Total Power Construction Spending

Source: MetalMiner IndX and US Census Bureau

Although total US power spending declined during Q1 of this year, the numbers through April have held steady. And according to Reed Construction Data, power spending will continue to grow through 2013 which, if true, would provide strength on the demand side of the equation. For a historical comparison check out this graph, marking the same GOES index data against power construction spending:

Source: US Census Bureau: compiled by Jack Taylor

Supply Factors Good for Buyers

One of the key inputs of GOES involves hot rolled coil. Although scrap prices fell rather dramatically a couple of weeks ago, things have begun to stabilize on the scrap front. The forward curve for hot rolled coil suggests rising, not falling prices, but we haven’t seen steel prices plateau as of yet; that bottom may start to form during the next couple of weeks.

Does that mean now looks like a good time to buy? In falling or flat markets, we tend to say delay the buying decision until the last possible moment, but the second lead times start to extend, price increases will likely follow. Though the entire MMI® series for June fell, we can’t yet see if that looks like a single month of poor data, or will become part of a longer-term trend.

For actual GOES pricing data, MetalMiner readers can subscribe to MetalMiner IndX here.

As with all big hairy problems, problem identification represents the easy part.

Formulating and implementing solutions becomes especially difficult particularly when our own government can’t seem to agree on what to call the problem – is it a strategic mineral dependence? A rare earth metal dependence? Or ‘just’ a critical metal dependence?

As we reported last week, the American Resources Policy Network released a report, “Reviewing Risk: Critical Metals and National Security,” attempting to create a framework, or lens, from which all policy-makers (and other solution strategists, which we’ll come to in a moment) can agree as a way to evaluate a broader range of metals as part of our “metal dependency.” See our first piece covering that story here. This broader range of metals covers applications for national security to consumer products.

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