It may be called the light metal but the way aluminum is defying gravity can’t last. At the same time as visible stocks are rising to nearly 3.5 million tons ” yes you read that right, check out the LME, the price has still managed to make an 8.4% gain last week. Three months metal is currently sitting at over $1400/ton (US$0.63/lb) on the LME and is proving surprisingly resilient even as the whole base metal sector takes a pause and retrenches slightly.
It is counter intuitive that stocks should rise to such levels and yet prices are rising too. What is driving it? Lead by the Chinese State Reserves Bureau (yes them again) both the SRB and state governments have been buying primary ingot from the local smelters to support the local producers. Worse they have been paying over the market price which has widened the Shanghai Futures Exchange (SHFE) vs. London Metal Exchange (LME) arbitrage, the difference should represent no more than the cost of importing ingot into the country (shipping, import and vat costs). According to Reuters the SRB has purchased 590,000 tons. The state of Guangxi announced plans to buy 200,000 tons. The state of Henan 500,000 tons, while the states of Jiangxi and Shaanxi have confirmed they will buy but have not set the tonnages yet. As the arbitrage window has widened, China’s position as a net exporter has reversed and imports have ballooned. Primary aluminum and aluminum alloy net imports were 13,000 tons in February up from 8,000 tons in January and set to be even higher in March.
The smelters have responded by bringing idled capacity back on stream ” largely the objective of the SRB ” as western producers have been desperately shutting down capacity. The result is Chinese production (already the largest producer in the world last year) has gone up as western production has gone down. Non Chinese annualized production in February fell by 475,000 tons but Chinese annualized production rose by 790,000 tons, creating a net increase as world stocks continue to rise.
The SRB and states next steps will be closely watched, they surely cannot have intended to create a surge in imports. The object of the exercise was after all to support local smelters but now those pot-lines have been re-started and companies will expect demand to continue. The government has suggested they will offer lower power costs to enable the smelters to operate profitably again, but that will not create a home for the metal they produce. Logic says the stocks must eventually come down or the price must eventually come down, they can’t both continue to rise.
Interestingly when Vladimir Putin was asked recently if Russia intended to buy metals as a state reserve from domestic smelters he dismissed the question saying: “Firstly, it’s impossible to buy metal for the whole world. Secondly, we wouldn’t know what to do with it.” A perceptive reply on both counts!