The London Metal Exchange aluminum price has risen steadily since this time last year and seemed at times like it may hit, if not breach, $2,000 per metric ton. Many consumers are asking how much further does it have to go? will it break that psychologically important barrier anytime soon? and if it does, how much further does it have to go?
To understand this, we should consider what has caused price strength in recent months and that you will not be surprised to hear is easy to list, but harder to judge to what extent each factor has had an impact.
Why is Aluminum Up?
First, there are general commodity category price drivers, nearly all base metals have shown price strength over the period as industrial demand has remained positive and surplus supply markets have either tightened or gone into outright deficit. In the case of aluminum, there are several indicators suggesting the market deficit has increased over the last 12 months. Physical delivery premiums have increased not just in Asia, but in the U.S. with the Midwest premium currently trading just below ten cents per pound on the CME Group exchange, up from six cents per pound in the third quarter of last year. Japanese physical delivery premiums have been agreed at $128 per metric ton for the second quarter up from $95 per ton for the first quarter.
Meanwhile, LME inventory continues to decline with almost 400,000 mt electing to leave the system in February alone. Now it must be said that not all this metal is destined for consumption, as Andy Home in a recent Reuters article points out, the majority of metal leaving the LME system is almost certainly heading to off-market lower cost storage options.
However, the article does quote commodity consultant CRU Group who estimate that the supply deficit outside of China increased from 194,000 mt in 2015 to 821,000 mt last year. They are expecting it to balloon further to almost 1.3 million mt this year. All of which suggests that while the fall in LME inventories may not be a good guide of industrial consumption or the true state of supply and demand, the physical delivery premiums probably are and support the gradually tightening market hypothesis
Arguably though, price strength in the last three-to-six months has had more to do with expectation than reality. China’s robust implementation of its environmental clean-up act has been impressive, with periodic smelter inspections and considerable state pressure being brought to bear to close plants not meet environmental standards.
Declarations of intent to close capacity next winter, not just of aluminum but of coke anode plants and alumina refining has set expectations that a market estimated by CRU inside China as being in slight deficit last year could remain in deficit this year, causing supply to tighten further. It is probably that expectation more than anything that is supporting prices.
The global aluminum market is in deficit, to what extent is almost impossible to judge with any degree of accuracy, but probably less than many estimate. That would cause many other commodities to continue to rise but the aluminum market has the 800-lb gorilla in the room, some 5+million mt of stock and finance trade inventory held in medium-term storage.
How quickly that metal makes its way onto the market will be a function of the LME price and of the spot-to-term financing spreads. Its presence, though, encourages most to accept there is an upper limit to the price, unless fundamentals change that $2,000/mt barrier will likely prove just that this year. Falls back into the low 1,800s represent a buying opportunity, but current prices in the mid 1950s are proving resistant.