Industrial metals for the most part fell in April, but that wasn’t the case for aluminum. The lightweight metal outperformed its peers as aluminum is expected to be the next target of supply-side reform in China, according to Goldman Sachs.
The New Steel?
While China tries to transition from a manufacturing economy to a service-driven one, it is aiming to cut industrial overcapacity due to environmental problems. China previously indicated its strong intentions to implement supply-side reforms in the steel industry. As a result, steel prices in China rose by 70% in less than a year.
China’s energy intensive aluminum smelters receive nearly 90% of their energy needs from coal. In addition, China has received a lot of international pressure to reduce its aluminum capacity. For these reasons, aluminum could be the new steel this year.
To start, China announced in late February that it would cut as much as 30% of its aluminum production over the winter months. As my colleague Stuart Burns put it, “Beijing has shown solid intent in this direction, already denying planning approval to 2 million tons of new capacity in China’s northwest province of Xinjiang and clamping down hard on plants elsewhere that it deems to be failing environmental standards.” In addition, industry watchers believe that this might just be the beginning as more closures are expected to come in heavily industrialized provinces.
The only question for aluminum bulls is whether the smelters that are not affected by government actions will take advantage by rising output. That’s definitely something that could ruin the bulls’ party.
Trump Launches a 232 Investigation
Another element that’s contributing to higher prices this year is tension over aluminum imports.
In April, President Donald Trump met with China’s president and agreed to a 100-day plan to reduce the U.S. trade deficit, among other things. On China’s part, cutting aluminum and steel production over this period would ease tensions in this area.
In addition, at the end of April, Trump signed a memo to order an acceleration in the investigation of aluminum imports, citing concerns over national security. The allegation is that these imports are jeopardizing U.S. national security since aluminum is used extensively in the U.S. military.
What This Means For Metal Buyers
Aluminum continues to hold its gains, even during price weaknesses across the industrial metal complex. We expect aluminum to outperform its base metal peers this year but the recent weakness across the metal complex could certainly limit upside moves in aluminum prices. Buying organizations should watch closely for new capacity shutdowns in China and how that translates (or does not translate) into lower production rates.
Actual Aluminum Prices
- Chinese aluminum scrap finished the month at $1,843 per metric ton, up 3% from last month.
- Chinese aluminum billet also rose 3%, finishing the month at $2,085 per mt.
- Korean 1050 aluminum finished at $3.22 per kilogram, almost flat from last month.
- The LME aluminum primary three-month contract finished the month at $1,937/mt, down 1%.