Aluminum led industrial metals in February. Prices on the London Metal Exchange rose above $1,900 per metric ton for the first time since May 2015.
In February, China finally approved its Air Pollution Control regulations, which came into effect on the March 1.The world’s largest nation-producer of the metal will force about “a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi to be shut down over the winter,” according to Reuters, which runs from the middle of November through the middle of March.
The idea was first proposed in January and initially there was skepticism. Markets know that in the aluminum industry it takes time to ramp down and ramp back up production with smelters taking significant losses. This time, China is committed to enforcing the new law and it will prevent local authorities from protecting local smelters.
Some 40% of China’s total capacity is potentially affected and analysts estimate that a 1.3 million mt of output will be lost. However, this figure could be larger since the new law will also impact the supply of raw materials such as alumina and carbon anode plants. Other industry analysts see a loss of 3 mmt of aluminum capacity.
The previous years of supply surplus might provide some cushion against the sort of disruption planned by Beijing. However, this potential supply shock is unprecedented in the aluminum industry and could translate into a complete game changer in terms of aluminum’s fundamentals.
Chinese citizens have previously protested about pollution issues, but tensions are getting much worse. In February, more than 200 people chanted and held banners outside the Daqing city government headquarters to protest against a new aluminum plant. Although the plant would produce more than 30,000 jobs to locals, they now prioritize pollution reduction over employment. As we’ve warned in previous reports, it’s hard to put a limit to aluminum’s price potential as smog moves to the top of Beijing’s policy agenda.
Midwest Premiums Hit $0.1/Pound
Midwest premiums continued to climb in February, hitting an almost three-year high. As we warned last month, in addition to higher aluminum prices due to supply cuts, we could see higher aluminum premiums this year due to ongoing trade tensions, just as we saw the spread between domestic and international steel prices widen.
The U.S. “experienced a sharp contraction in aluminum smelting capacity over the past year,” wrote Reuters’ Andy Home. This has created a case of supply shortfall within the U.S., which now depends on aluminum imports to satisfy its rising domestic demand.
This year, the U.S. lodged a formal complaint against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry, according to multiple mainstream news sources. The fight against imports is getting more serious and this is something that could support domestic aluminum premiums this year.