aluminum price

Goldman Sachs has set pretty optimistic forecasts on aluminum prices. According to a recent report from CNBC, the bank expects prices to hit $2,000 per metric ton in six months and $2,100 per ton within a year.

3M LME aluminum. Source: fastmarkets.com

I’ve also been pretty bullish on aluminum since last year. Similar to what we saw in the steel industry, China put cutting aluminum capacity on the top of its agenda as the country takes air pollution seriously. In addition to supply cuts promises, China’s economic numbers were running strong at that time. However, just recently, our commodity outlook is moving from bullish to bearish, and being bullish on aluminum while commodity markets weaken is a very hard sell. Here are some reasons why Goldman Sachs might need to adjust its aluminum outlook.

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Aluminum Output Up

Goldman expects aluminum to be the next target of supply-side reform in China. The bank expects aluminum to be the new steel this year. Sentiment in steel markets got a boost on Beijing’s announcements to cut steel capacity. But as time goes on, markets are starting to realize that capacity cuts don’t mean lower output, at least in China.

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AdobeStock/Pavel Losevsky

Beijing’s focus on supply-side reforms of China’s giant aluminum industry has been a prime mover for the metal price this year.

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But primary metal price rises aside, of more concern to aluminum consumers should be the nature and extent of China’s aluminum semi-finished product exports. There have been various facets to China’s product exports, as Andy Home of Reuters succinctly explained in an article last week.

On the one hand, the growing volume of product exports has ignited considerable trade tensions with the U.S. and Europe. In the case of the former, the article reports, it led to a formal complaint to the World Trade Organization (WTO) and, more recently, a Section 232(b) investigation under the Trump administration. In Europe, expiring duties have been rolled over on imports of aluminum wheels from China and further action sought by trade bodies on a range of aluminum products.

Meanwhile, rumours that an indeterminate but significant proportion of China’s semi-finished product exports were in fact primary metal being illegally classified as semi-finished product to circumvent export duties on unwrought aluminum have at least partially been vindicated, as a focus has been brought to bear on a massive stock of aluminum held in Mexico last year that appeared to originate from Vietnam but with links to China.

Home explained that China’s exports of commodity code 7604 (bars rods and extruded profiles) have mushroomed from just over 6,000 tons in 2012/2013 to 463,000 tons in 2015 and 510,000 tons in 2016. Some of that metal appeared in Mexico last year before media attention encouraged the metal to be recycled back to an obscure port in Vietnam. Read more

If I had to pick a base metal to put my money on this year, it would have been aluminum. The lightweight metal presented an attractive bullish narrative due to the combination of rising political tensions and the potential for supply cuts in China.

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China has pledged to cut as much as 30% of its aluminum production over the winter months to reduce emissions from one of its most energy-intensive industries. In addition, the country has received a lot of international pressure to reduce its aluminum capacity.

The U.S. is trying to find new ways to make things difficult for Chinese aluminum exporters. Recently, President Donald Trump signed a memo to order an acceleration in the investigation of aluminum imports, citing concerns over national security. Last week, the Wall Street Journal reported that massive state-run Chinese companies helped China Zhongwang finance an illegal game of moving stockpiles around the globe to avoid paying punitive import tariffs to the U.S.

If we narrowed our view to the industry fundamentals, it would be hard to expect any downside in aluminum prices. However, broadening our view, there are a couple of factors that could put a downward pressure on aluminum for the rest of the year, especially after such a steady rise.

Potential Slowdown in China’s Demand

As I mentioned yesterday, “China is putting efforts into halting risky lending and rising borrowing costs in order to limit credit growth. Interest rates in China have risen to the highest level in two years while China’s tough talks on curbing credit are expected to put the brakes on credit growth, [hurting demand for industrial metals.]” Read more

The Commerce Department launched an investigation on Wednesday to determine whether a flood of aluminum imports from China and elsewhere was compromising U.S. national security, a step that could lead to broad import restrictions on the lightweight metal.

Commerce Secretary Wilbur Ross said the investigation is similar to one announced last week for steel imports into the U.S., invoking Section 232 of the Trade Expansion Act of 1962.

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“Here’s why we did it,” Ross told reporters, “Imports have been flooding into the aluminum industry and the defense angle is that high-purity aluminum is used in the F-35” as well as other military aircraft and vehicles. In the event of a war, domestic manufacturers might be unable to meet the Pentagon’s needs, Ross said.

The investigation mirrors a probe Commerce launched a week earlier focusing on the steel industry, also invoking section 232 of the act. North American aluminum trade groups have been pushing for such action for the last five years.

Beijing is caught in something of a quandary.

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On the one hand, an admirable, and increasingly important social imperative, the Chinese government’s focus on air pollution, has resulted in a crackdown on a range of polluting industries. Coal-fired power stations around Beijing and other major cities have been closed. Steel capacity has been targeted for cutbacks, although not universally.

Reports suggest rebar production used in construction has been prioritized over other product areas and that’s just one example of selective enforcement. A recent report by Reuters states new aluminum production capacity has been halted. What China fails to meet capacity cutback targets — an issue one suspects would have been “worked around” a year or two back when environmental considerations where less of an imperative?

This crackdown on output comes at the same time as the economy is performing quite well. Official data released last week showed China’s economy grew by a better-than-expected 6.9% comparing the March quarter to the same period in the previous year, Australian Financial Review reports. That is up from 6.8% in the final quarter of 2016. Industrial production was also far better than forecast, growing at 7.6% in March compared to 6.3% in first two months of the year. Read more

The London Metal Exchange aluminum price has risen steadily since this time last year and seemed at times like it may hit, if not breach, $2,000 per metric ton. Many consumers are asking how much further does it have to go? will it break that psychologically important barrier anytime soon? and if it does, how much further does it have to go?

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To understand this, we should consider what has caused price strength in recent months and that you will not be surprised to hear is easy to list, but harder to judge to what extent each factor has had an impact.

Why is Aluminum Up?

First, there are general commodity category price drivers, nearly all base metals have shown price strength over the period as industrial demand has remained positive and surplus supply markets have either tightened or gone into outright deficit. In the case of aluminum, there are several indicators suggesting the market deficit has increased over the last 12 months. Physical delivery premiums have increased not just in Asia, but in the U.S. with the Midwest premium currently trading just below ten cents per pound on the CME Group exchange, up from six cents per pound in the third quarter of last year. Japanese physical delivery premiums have been agreed at $128 per metric ton for the second quarter up from $95 per ton for the first quarter.

Source: Reuters

Meanwhile, LME inventory continues to decline with almost 400,000 mt electing to leave the system in February alone. Now it must be said that not all this metal is destined for consumption, as Andy Home in a recent Reuters article points out, the majority of metal leaving the LME system is almost certainly heading to off-market lower cost storage options. Read more

Liquid metal

The Chinese aluminum industry has been able to cut costs by essentially selling liquid metal to nearby product manufacturers. Source: Adobe Stock/Kybele.

The head of aluminum for Rio Tinto Group is making a bold prediction: prices for the metal are heading for an “extremely” volatile crossroads.

According to a recent report from Bloomberg, Alfredo Barrios cites uncertainty with the timing of China curbing production, which will further serve to keep investors on the edge of their seats.

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“That’s really where the uncertainty is at the moment,” Barrios told Bloomberg in an interview at their Toronto office. “There’s no doubt that if you look at the supply side, if you look at the environmental issues, sooner or later that will change. But when is a question mark.”

China continues its fight against pollution by ordering to reduce steel and aluminum output in more than two dozen northern cities.

Aluminum Price Impacted by Overcapacity, High Inventory

Barrios added that overcapacity and high inventory could impact aluminum price increases in the near future.

“There’s a number of factors which will dampen any price increase if it goes too far,” he told the news source. “If you look at what are the fundamental reasons behind why prices are where they are, and how different they are from a year ago, it’s sometimes very difficult to see what has made aluminum be higher at all. What’s changed so radically in the last year?”

How will aluminum and base metals fare in 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Our Aluminum MMI rose again in March. London Metal Exchange prices rose above $1,950 per metric ton and, given the bullish sentiment among investors, aluminum might soon reach the $2,000/mt milestone.

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Prices were buoyed by confidence that China will implement their agreed-upon cuts. The world’s largest nation-producer of the metal will force about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi to be shut down over the winter season, which runs from the middle of November through the middle of March, putting at risk about 1.3 million mt of production.

Aluminum MMI

It would be normal to see these producers to simply ramp up production ahead of the winter season to make up for lower output during the winter months. However, that won’t be the case.

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U.S. automakers’ sales figures for March came in below market expectations and gave early evidence that America’s long boom cycle for automotive sales may finally be losing steam. Automakers sold 1.56 million new cars and trucks in March, a 1.6% decline compared with the same month a year ago.

Ford Motor Company took the biggest hit among sales drops, seeing its March numbers fall more than 7% from February’s.

Industry consultant Autodata put industry Seasonally Adjusted Annual Rate at 16.62 million cars, trucks and SUVs for March.

That was below the 17.3 million analysts polled by Reuters had expected, and the first time since August that the SAAR – a crucial industry metric – had fallen below 17 million.

General Motors had the best month, reporting a 2% increase in sales to just over 256,000 vehicles, with sales of its Tahoe and Suburban SUV models seeing their best sales month since 2008.

Sales at Ford Motor Co. fell the aforementioned 7+% to 236,000 vehicles, with fleet sales to rental agencies, businesses and government entities down nearly 17% on the year. Sales of Ford’s F-Series pickup trucks rose 10% but that simply could not offset the losses elsewhere. Sales at Fiat-Chrysler Automobiles fell 5% in March. Automotive sales in the U.S. risen since end of the 2008 recession and hit a record last year of 17.55 million last year. Toyota Motor Corp. and Honda Motor Co. reported smaller losses.

The fall in new car sales is even more curious considering that consumer confidence is at its highest level since 2000. Could the level of vehicle replacement that had driven sales since 2008 finally be falling? Vehicle inventories at dealerships have risen to the highest point since 2004, according to Edmunds.com.

If auto sales have, indeed, plateaued, then prices for automotive steel and aluminum could as well, at least in the expansive U.S. market. Our Automotive MMI remained flat this month at 88.

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China’s aluminum industry is under siege. You wouldn’t think so from the booming production figures, rising prices and howls of protest from aluminum producers in the rest of the world.

Benchmark Your Current Aluminum Price by Grade, Shape and Alloy: See How it Stacks Up

But, arguably, China’s aluminum industry is the victim of its own success.

Liquid metal

The Chinese aluminum industry has been able to cut costs by essentially selling liquid metal to nearby product manufacturers. Source: Adobe Stock/Kybele.

On the one hand, the political heat is rising as China’s production capacity has exceeded 50% of global output even as a combination of low aluminum prices and the collapse of physical delivery premiums in recent years has forced producers in the rest of the world to rationalize production, mothball plants and shelve capital investment plans that do not seek to simply slash costs.

Rise of Semis Buoys Industry

The rise of Chinese semi-finished product exports has stimulated a wave of legal challenges around the world alleging unfair trade practices and causing considerable uncertainty for Chinese manufacturers with aspirations beyond their own shores. Read more