As we predicted last week, the LME to SHFE arbitrage window has closed.
Investors were unlikely to leave that open for long and the resulting inflow of half a million tons of aluminum in May no doubt contributed to a narrowing of the delta.
What was driving it, though was apparently stronger demand in China than the rest of the world. However, an easing of lockdowns everywhere has raised the expectation that aluminum demand will pick up in the rest of the world.
That sentiment is no doubt contributing to an across-the-board strengthening in the metals complex and firmer LME aluminum prices, which briefly topped $1,600/mt last week.
Nor does the LME price seem unduly bothered by the massive buildup of stock that has been going on this year, reported by my colleague Maria Rosa Gobitz, as possibly reaching 16 million tons this year – back to post-financial crisis levels. Imports may also have been a result of a tight scrap supply market in China during the months of lockdown, resulting in a scarcity of raw material and, hence, demand for ingot.
China’s relatively strong demand appears to be supported not just by a high primary ingot price but by a drop in exports of semi-finished products. Semis exports have long been seen as more of a pressure release valve to dispose of excess product than as a core marketing objective of the Chinese aluminum industry (although its domination in terms of size and number of stands at aluminum exhibitions in recent years may suggest otherwise).
Whether core business objective or release valve, exports have been steadily dropping for the last couple of years. Rather than reverse this trend as many expected, exports have continued falling during the pandemic. ING bank reports that total exports of unwrought aluminum and semis products declined to 383 kt, marking a third straight month of declines.
Meanwhile, SHFE inventory has been falling, again suggesting metal demand remains robust in China, which is certainly the opinion of Russian aluminum firm Rusal in a recent report. May’s semi-finished product exports are down by nearly 30% from the same period last year, which is perhaps not unexpected if domestic ingot prices are at a premium to global LME-related metal prices. Anecdotally, Chinese semis producers are still offering metal at relatively competitive levels; poor demand outside China may be more to blame as economies struggle to encourage a return to robust growth.
Further weakness in Chinese exports, therefore, remains a probability through the summer unless a significant leveling of the SHFE-LME price differential gives a fillip to Chinese semi producers, allowing more aggressive pricing.