The medium term future for the aluminum price depends on China.
How many times have we heard that before? Not just for aluminum but for a host of other base metals, too.
But the reality is China is running a deficit and sucking in metal from the rest of the world, where demand is already robust. Downstream mill lead times extended and inventory of semi-finished product is at decade lows.
Stop obsessing about the actual forecasted aluminum price. It’s more important to spot the trend.
Aluminum output, imports in China
According to a recent Reuters post that examines the collapse in domestic aluminum smelter output this year, China’s national output of aluminum in February peaked at an annualized rate of 39.7 million tons. Meanwhile, International Aluminium Institute (IAI) estimates for October put output just past where output had dropped to 38.5 million tons, as the country imported another 140,000 tons, bringing the year-to-date total to 1.27 million tons — almost exactly matching the February to October fall.
These imports have been sucked in from producers, traders’ stocks and exchange inventory. In turn, that has tightened availability for processors in the rest of the world.
London Metal Exchange (LME) stocks have fallen to 893,775 tons, their lowest level since 2007.
Output has increased from the rest of the world outside China, but only incrementally. Output increased by 1.7%, according to Reuters, to 21.97 million tons in the first 10 months of this year, quoting IAI data.
Decisions around new capacity or capacity restarts are being driven by a similar dynamic as in China — that is, the environmental footprint of the power source.
Hydroelectric and renewable power sources are seeing support. However, both are limited. Hydro faces scarcity of suitable geological locations. Renewables, meanwhile, are limited because of the backup needed to meet the inevitable variability.
Obsession with low-carbon power supply, however, should not be seen as an altruistic climate change dynamic. Low-carbon aluminum is achieving a premium in the market, a trend that is only likely to get stronger as time goes by.
China has plenty of capacity it could bring on stream — nearly 44 million tons of installed capacity compared to actual production of 37-38 million tons, depending on whose data you accept.
However, a focus on emissions is enforcing rationing of power from or complete shuttering of some coal-fired power plants. Furthermore, drought has limited hydroelectric power generation.
Aluminum price future
Under such circumstances, the wonder is the aluminum price is not higher. The market is conscious that China could reverse policy on power supply at any time. Now, coal supply has improved, increasing power supply and, hence, aluminum output in the New Year. In addition, demand has been strong for downstream products.
But there are signs mills are beginning to catch up. Distributor inventories are improving, making the underlying dynamics for a push higher in prices doubtful. Views vary, but while calls for prices to drop to $2,200 by the end of the next year are probably excessive, the risk for now looks more to the downside than up in what has been a sideways market for some weeks now.
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