Aluminum Prices Rising Despite Weak Demand

The aluminum price is a contrary thing, isn’t it?
For months, aluminum prices have been falling on the basis that demand is waning due to slowing global growth (particularly in top consumer China).
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China’s gross domestic product growth slowed again to 6.0% year over year in the third quarter, its weakest pace in almost three decades, Aluminium Insider reports. Citing a Reuters poll, the report notes industrial activity is expected to have shrunk for the sixth month in October, quoting a Reuters poll, suggesting hardly any relief from slowing global demand and the trade war.
The latest economic data from the E.U. and the U.S. also indicate slowing growth, with Germany flirting with a recession in the manufacturing sector. Although the aluminum market was estimated to be in deficit last year and this, a Reuters poll suggests it is likely to flip into a surplus of 304,000 metric tons next year — almost a 1 million ton turnaround from the 658,500-ton estimate for this year.
The article went on to say the consensus among major producers is that global aluminum demand growth will be flat (around zero) this year. Norsk Hydro predicts demand outside China will fall by 1-2%, meaning global demand is likely to fall by 0.5%. Alcoa took a similarly pessimistic view.
So why has the aluminum price currently taken a run-up to nearly $1,800 per metric ton on the back of, Reuters reports, supply fears?
It would seem investors are somewhat jittery and struggling to read the fundamentals.
Talk of Rio Tinto having to reduce output (or worse, shut its New Zealand smelter due to high power costs) and China’s second-place Chalco closing 200,000 tons of capacity in Shandong for the same reason seem to have stoked fears a number of smelter cutbacks could lead to a shortage.
Investors also view falling LME and SHFE inventories as a sign of a tightening market.
Aluminum stocks in SHFE warehouses dropped to their lowest level since March 2017 at 278,736 tons, while LME aluminum inventories dipped to their lowest since Sept. 30 at 956,200 tons, according to Reuters.
On the flip side, top consumer China is importing more and more remelt alloy ingots as part of its raw material product mix, which is finding its way through to increased exports of low-priced semi-finished products. China exported 4.37 million tons of mostly semi-aluminum products in the first nine months of the year – 2.8% more than in the previous year.
Primary production may be marginally down, but China is still supplying the world with semis, depressing activity at domestic extrusions and rolling mills in Japan, Europe and, by extension, the U.S.
Although the U.S. doesn’t import Chinese extrusions or billet, material supplied from elsewhere that has been displaced by Chinese metal does find its way in. Extruders are suffering, as illustrated by the low billet premiums prevailing in the U.S. right now.
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While some polls have suggested aluminum prices could be back over $1,800 per ton next year if current conditions prevail, that looks unlikely.
More than just sentiment is being depressed by the trade war. With little chance of a resolution this side of the presidential election, manufacturing is unlikely to recover strongly enough to materially impact the supply-demand balance anytime soon.