Wondering why aluminum prices have pulled back from highs of $2,200 per metric ton on the LME?
After all the hype about environmentally driven smelter closures in China this year and the additional curtailments to be forced on the market in certain provinces during the winter heating seasons, most were expecting the run up in prices to hold steady (at least during the winter period).
In practice, although prices have made impressive gains from lows of $1,700 per ton earlier this year to five-year highs of over $2,200 per metric ton, it was largely on the pretext of constrained primary metal supply that it is beginning to become apparent is not happening.
According to China’s National Bureau of Statistics (admittedly not the most reliable of sources) Reuters reports China’s aluminum smelters churned out 2.35 million metric tons of the metal in November, down 7.8% from 2.55 million tons in October and down 16.8% from a year ago.
In reality, while headline smelter capacity has been closed, new planned capacity has continued to quietly come onstream.
By the end of 2017, 4 million metric tons of new capacity across 25 expansion projects is projected to come online according to Aluminium Insider. In 2018, an additional 3.2 million metric tons per annum in 18 projects is expected to be commissioned.
Further out, expansion projects are expected to fall off significantly in 2019 and beyond, dragging down medium-term production growth; however, any significant impact on prices is more likely to be into the next decade as a result.
The run up in prices had been all about China. The rest of the world has been in deficit for a couple of years. Indeed, the World Bureau of Metal Statistics says in its most recent report that 2017’s deficit doubled from 2016, but some 3 million tons of Chinese semi-finished exports mean the global market for wrought aluminum products has been well supplied.
Interestingly while LME prices have pulled back over the last month, semi-finished prices have remained stubbornly resistant to significant weakening, driven by strong demand and full mill order books.
For the first time in some years, strong GDP growth and solid demand across the U.S., Europe and Asia have seen semi-finished product mill order books extend. As a result, mill premiums have risen, even as primary metal prices have eased. With some mills sold out until well into the second quarter, this situation is not expected to ease anytime soon; metal availability could become an issue in the first half of next year.
Consumers may be advised to forward order at fixed premiums, but floating underlying metal price to avoid further rises in conversion premiums while still taking advantage of any weakening in the LME.