Has the Aluminum Bull Market Come to a Skidding Halt?

Aluminum buyers are understandably nervous about the future price direction following the near 9% fall in prices from a high in early January.
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Aluminum on the Shanghai Futures Exchange closed at the lowest level this week in 14 months, particularly unsettling as the industry had become comfortable with a bull narrative for aluminum over the last year predicated on tight global supplies outside of China.
President Trump’s 10% import tariff on aluminum added another dynamic to the domestic U.S. price and considerable uncertainty as to the possible impact on prices in the rest of the world.
Not surprisingly, while the LME price barely reacted to the new tariff, domestic U.S. Midwest delivery premiums nearly doubled from 9.5 cents per pound at the start of January to the current 18.5 cents per pound. Expressed in dollar terms, the jump in premiums by some $200 dollars a ton equates to nearly 10% of the cash LME aluminum price, Reuters reported this week.
Meanwhile, delivery premiums outside of the U.S. had already been on the rise, so there was little surprise when Japanese buyers settled this week at U.S. $129 per metric ton premium for shipments in the second quarter, the highest in three years.
Although last year saw tightness in physical metal availability, the return of the contango on the LME, with cash aluminum falling below the three-month price, suggests there is now greater availability of nearby metal (at least in the rest of the world outside the U.S.).
There is certainly no shortage of metal available in the Chinese market, where Shanghai inventory has been rising for 12 months. Indeed, much of the current weakness is blamed on fears that smelter restarts following the end of the Chinese winter heating season will cause the surplus to balloon further.
Prices in China, though, are below those of the LME and industry sources are suggesting there will only be limited restarts as current prices are not enough to help some smelters break even, according to a Reuters report. Oliver Nugent is quoted by the news source as predicting prices will remain below $2,100 in the first half of the year because of Chinese surpluses, but persistent shortages outside of China would likely see the price rise again in the second half of the year.
Smelter restarts in the U.S. are unlikely to be significant enough to materially impact global supplies ,with Reuters suggesting Century Aluminum’s restart of 150,000 tons at Hawksbill, Kentucky, Magnitude 7 Metals’ restart of two out of the three pot-lines at the 263,000-ton Marstons smelter in Missouri and Alcoa’s already initiated restart of some of its idle capacity at the Warwick smelter Indiana will almost be enough to achieve the administration’s capacity 80% target mentioned in the Section 232 determination.
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The broad consensus appears to be that aluminum remains in a long-term bull trend, but in the short term will operate as a sideways market. Buyers are unlikely to see significant upside to $2,100 in the first half, but should keep the market under close review as, subject to developments, the second quarter may prove a low point for the year; therefore, that time period may represent a buying opportunity.

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