Source: Adobe Stock/ alexlmx
Aluminum producers are in a race to the bottom, desperately trying to reduce their production costs so they can maintain output and, by extension, continue to flood the market with metal that it doesn’t need.
As UC Rusal’s third quarter earnings plunged 11% and it announced plans to cut a further 200,000 metric tons of capacity, US smelters have been closing capacity like the metal is going out of style, as we reported earlier this month.
But, if you think business is bad for western smelters, out in Asia it is almost worse. Japan is the worlds largest seaborne aluminum market, importing metal rather than using high-priced domestic power to smelt the metal at home.
Japanese Premiums Plummet
As such, the Japanese physical delivery premium has long been a benchmark for the supply-demand balance of the physical market. As in Europe and North America, physical delivery premiums in Asia have collapsed this year, with Q4 premiums just being fixed at $90 per metric ton, according to Thomson Reuters‘ Andy Home, recently.
Japan’s premiums are currently lower than Europe and the US because of a near 3 million metric tons of metal that has flowed out of China this year, much of it into the surrounding market. Some as primary metal masquerading as semi-finished products, sure, but most as bona fide semis which have displaced consumption of primary metal by the region’s fabricators. As a result Japan’s port stocks have mushroomed to just under 500,000 mt from a historic norm of 200-300,000 mt.
Primary producers were hoping high power costs in China would eventually curtail production there and give respite to the persistent surplus created by China’s overproduction, but recent reports in Reuters suggest otherwise.
Chinese Smelters Want Lower Power Costs
Chinese smelters have been pressuring domestic power companies to reduce electricity tariffs to allow them to reduce costs and maintain production. One state-owned smelter, Liancheng in Gansu province is reported to have reduced power costs by 35%, with power making up some 40% of the cost of production, that suggests power costs were reduced from about $640 per mt to about $420 per mt.
An executive at a private smelter in Guizhou is quoted as saying his firm’s production costs will drop to 10,000 yuan/mt ($1,568) if they achieve the same Yuan 0.25/kwh rate as the state smelter above. That would see smelters with reduced power costs producing at breakeven based on current Shanghai Futures Exchange prices, a situation they have shown this year to be prepared to tolerate for extended periods.
What Would Fibonacci Say?
Chartists, it would seem, agree with this negative view. A Reuters article reports London Metal Exchange aluminum is expected to retest a support level at $1,462 per mt, with a good chance of breaking below this level and falling more to the next support at $1,445 per mt. We have never been great followers of the Fibonacci-based chartists’ approach, but many investors are, under the right circumstances, therefore these predictions can be self-fulfilling and so deserve note as part of a wider assessment of the price dynamics.
Incidentally, the next support level below that is $1,418 per mt, a level more than one trend line in the chartists’ model suggests could be on the cards — not that primary producers will want to hear that.