Aluminum price increases this year have been minimal compared to what we’ve seen in steel prices. However, the metal is rising slowly but steadily as investors see an opportunity to buy aluminum when prices fall short-term.
That’s exactly what happened this month, after prices sold off in May, investors are again jumping on the metal.
A recovery in demand is a key factor supporting aluminum prices this year. China unleashed a renewed government stimulus in the form of credit expansion and infrastructure building in December, which has — at least momentarily — improved the demand side of the equation for industrial metals.
Trade figures this year showed China’s relatively strong appetite for aluminum. Higher demand means exporting less as Chinese companies are consuming more aluminum domestically. China’s exports of unwrought aluminum and aluminum semis were 420,000 metric tons in May. From January to May, exports are down 7.9% compared to the same period last year.
Overcapacity Still an Issue
China has committed to stop the expansion of steel capacity and to actively and appropriately wind down “zombie enterprises” through a range of efforts, including restructuring and bankruptcy. That’s not the case when it comes China’s equally giant aluminum sector.
China and the U.S. failed to reach an agreement on how to address excess global aluminum capacity in early June. Although aluminum and steel markets have some similarities, there are also some key differences that explain China’s willingness to engage with its steel critics but not its aluminum critics.
First, China’s steel industry represents an old economic model that keeps loosing money due to poor profitability. In contrast, China also has some of the most modern and lower-cost operating smelters in the world, although China’s aluminum industry has its own loss makers, too. It’s understandable that China is more focused on getting rid of old, high-cost capacity in its steel industry, rather than removing its new generation of aluminum smelters.
What Does China Actually Want?
Second, China wants to achieve market economy status in the World Trade Organization. But this goal is jeopardized by steel organizations and policymakers unhappy with the prospect of even heavier Chinese exports and less freedom in dealing with them.
The U.S.-based trade body Aluminum Association has also been fighting against China being granted market economy status, but it’s mainly doing it alone. The aluminum sector is simply not as important for European and U.S. politicians as the steel sector.
The recent monthly output figures from China’s non-ferrous metals industry group — the China Non-Ferrous Industry Association — have been even more unreliable than normal, showing swings of millions of metric tons from month to month. However, most analysts agree that smelters are reactivating capacity or at least not cutting in response to the rally in local prices.
What Aluminum Prices Mean for Metal Buyers
Aluminum prices are acting strong, thanks to a recovery in demand, a weak dollar and improved sentiment in commodity markets. Still, how much can prices really climb while cutting aluminum capacity is not on the top of Beijing’s agenda?