aluminum price

The 3-Month LME aluminum price soars. Source: Fastmarkets.com.

Aluminum prices hit $1,900 per metric ton this week. Aluminum has surged 13% so far this year.

China Proposes Supply Cuts to Fight Pollution

We already predicted at the beginning of January that China’s supply would be the most important price driver to watch this year.

Click Here for Current Metal Prices

In February, a Chinese government document proposed that about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi be shut down over the winter months. If implemented, they would be some of the most radical steps so far to tackle air quality in the country of 1 billion’s most polluted cities. Read more

We warned last month that the mostly small losses the prices our MetalMiner IndX experienced were caused by investors taking profits.

Click Here for Current Metal Prices

Our suspicions were confirmed when almost all of our sub-indexes had big price rebounds this month. The Automotive MMI jumped 12.2% Raw Steels 8% and Aluminum 6%. Even our Stainless Steel MMI only dropped 1.7% and has taken off since February 1 as nickel supply is even more in question now with both the Philippines and Indonesia’s raw ore exports in question.

The bull market is on for the entire industrial metals complex. Last month’s pause was necessary for markets to digest gains but the strong positive sentiment for both manufacturing and construction shows no signs of ebbing in the U.S. and Chinese markets.

One of the biggest social challenges facing the authorities in Beijing is that of environmental pollution. It’s not just the western media that is fixated by measures of particulate matter and images of impenetrable smog in Beijing, the general population has been moved to outright demonstration and the impact on the health of those living in the affected areas is an extremely serious issue causing widespread discontent. Beijing knows it must come to grips with this problem. Drastic action is required, and recent reports suggest the authorities are finally considering just that.

Click Here for Current Metal Prices

According to CRU Group, the Chinese Ministry of environmental protection is consulting industry groups such as the China Nonferrous Industry Association about a proposal to shut down 30% of the aluminum smelting capacity and 50% of alumina refining capacity during the big winter heating period from November to March in an effort to reduce coal-fired power consumption. Rumous of this proposal contributed to recent rises in aluminum prices even though the impact would not be felt before the end of 2017 and there is still considerable debate on how viable such a policy would-be.

Shutdown Plan

The provinces in question are Shandong, Shanxi, Hebei and Henan, home to a significant portion of China’s aluminum smelting and alumina refining capacity. According to an article by Aluminum Insider, Shandong produces 11 million metric tons of aluminum per year, Henan turns out 3.8 mmt, Shanxi is good for 1 mmt, while Hebei puts out 100,000 mt a year. Those four provinces account for 37% of the country’s total output of aluminum. Shandong refines 23.5 mmt of alumina per year, Henan produces 12.6 mmt, and Shanxi produces 20 mmt each year, combining to produce around 78% of the country’s total alumina output. Read more

China is a top producer of aluminum, and its ongoing battle against pollution could lead to production cuts and, subsequently, skyrocketing aluminum prices.

According to a recent report from Reuters, the aluminum price rally could also potentially be offset by the oversupply situation. Any kind of extreme market fluctuation would be dependent on the Chinese government following through on the shutdown of aluminum-rich provinces during the winter months.

Want a short- and medium-term buying outlook for aluminum, copper, tin, lead, zinc, nickel and several forms of steel? Subscribe to our monthly buying outlook reports!

“When the government in the past tried to implement measures to control production it wasn’t very successful,” Edgardo Gelsomino, research director at consultancy Wood Mackenzie, said. “The only time production cuts really happened in China was when the economics of the smelters didn’t work.”

Aluminum Prices Begin Year on a Strong Note

Our own Raul de Frutos wrote recently on exactly how much US aluminum prices and premiums can rise in 2017. Well, they started off the year strong. “While robust demand has supported aluminum prices, investors’ eyes have recently turned to the supply side of the equation. In December, China’s share of global aluminum output was more than 56%. The giant producer’s share of supply is now facing some serious risks,” de Frutos wrote.

He concluded: “In addition to higher aluminum prices due to supply cuts, we could see higher aluminum premiums due to the ongoing trade tensions, just as we saw the spread between domestic and international steel prices widen.”

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:

In January, aluminum prices broke through the $1,800 per metric ton level. That was an important development signaling that bulls are taking over. Just a month ago we pointed out that prices had upside potential.

We believe the key this year will be on the supply side and not as much on the demand side. These are some factors that could limit growth in aluminum output this year:

Pollution in China

A recent Chinese government document proposed that about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi should be shut over the winter months. That sparked excitement among aluminum investors. These provinces account for over 20% of global aluminum output.

Click Here for Current Metal Prices

In addition, late last month the country passed a law that will allow it to impose environmental protection taxes from January 2018, following an outbreak of hazardous smog in northern China where many industrial producers are located.

The takeaway is that China is taking air pollution seriously. Given that coal burning is the biggest contributor to air pollution in China, industrial metals supply could shrink this year, particularly steel and aluminum. Environmental closures are looking increasingly likely in China this year. What’s still up in the air is how much energy-efficient capacity will replace shutdowns in dirty capacity.

Trade Barriers

The fight against imports is getting more serious and this is something that could support not only aluminum prices but also midwest premiums, which rose to $0.09/pound in January. Recently, the U.S. launched a formal complaint against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry.

In addition, U.S. customs officials seized $25 million worth of aluminum linked to a Chinese billionaire accused of stockpiling the metal across the world. The move is the most potent action yet by federal authorities probing whether U.S. companies connected to Chinese magnate Liu Zhongtian illegally avoided nearly 400% tariffs by routing the metal through other countries.

The same combination of domestic environmental and foreign trade imperatives already forced China to get serious about steel capacity closures. Is it possible that we see a similar outcome in aluminum? Quite likely.

Rising Raw Material Costs

Many analysts argue that cutbacks in China won’t happen because aluminum prices are well above last year’s levels, when prices were trading at $1,450/mt. However, it’s important to note that production costs are well above last year’s levels, too. The increase in production costs will limit additional restarts this year.

Two-Month Trial: Metal Buying Outlook

Chinese coal production dropped 10% last year. Thermal coal prices doubled and hard coking coal prices quadrupled. China also proposed to close 50% of alumina refining capacity in Shandong, Shanxi, Hebei and Henan from November to March. Alumina prices already rose by more than 50% in 2016. Further shutdowns are likely to support prices of the raw material this year.

For full access to this MetalMiner membership content:
Log In |

Success is not just about skills and hard work, it’s also about being in the right place at the right time. That’s especially true in the commodity business. Let’s look at an example.

Click Here for Current Metal Prices

From 1995 until 2000, stock market indexes rose in the range of 200-500%. If you happened to be a fund manager during those years (being in the right place at the right time) you probably made a killing, regardless of how good of a manager you were. In contrast, if you ran that same fund over the next three years, in which stock indexes fell in the range of 40-75%, then investors would probably think you are a terrible manager.

The same thing applies to real state agents that happened to be there during the housing boom or to the NBA head coach, Phil Jackson, who took the helm of the Chicago Bulls when Michael Jordan delivered the franchise its best years… and then took over the Los Angeles Lakers when Kobe Bryant and Shaquille O’Neal rejuvenated that franchise. Not to take credit away from any of these individuals, but they didn’t have that difficult of a time delivering what was expected from them. Read more

Aluminum prices started the year on a strong note, finally overcoming the $1,800 per metric ton price level that had acted as a ceiling for more than a year.

Two-Month Trial: Metal Buying Outlook

While robust demand has supported aluminum prices, investors’ eyes have recently turned to the supply side of the equation. In December, China’s share of global aluminum output was more than 56%. The giant producer’s share of supply is now facing some serious risks.

For years, Chinese cities have been choking on the smog spewing from China’s industrial production sector but things have recently gotten worse. Last month, authorities asked 23 cities in northern China to issue red alerts as inspection teams scoured the country. The scale of the red alert measure shows that the Chinese government is taking air pollution seriously… at least this time.

Investors are now speculating about capacity cuts in China as the country released a new policy document with plans to close around a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi over the winter months to help reduce emissions.

The cuts, of course, might not happen. Implementation of the document is subject to feedback and it will be normal to expect reasonable complains from both affected producers and regional governments.

Aluminum Premiums Pick Up

US aluminum premiums. Source: MetalMiner IndX.

For U.S. aluminum buyers, the all-in aluminum price consists of the aluminum price plus regional aluminum premiums. The premium is a surcharge that consumers must pay on top of prevailing prices in order to take immediate delivery of the metal from warehouses.

Not only the price of aluminum has risen, but premiums also picked up last month, trading now at $0.09/pound. The U.S. has also experienced a sharp contraction in aluminum smelting capacity over the past year. This has created a case of supply shortfall within the U.S., which now depends on aluminum imports to satisfy its rising domestic demand.

The fight against imports is getting more serious and this is something that could support domestic aluminum premiums. Recently, the U.S. launched a formal complaint against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry.

In addition, U.S. customs officials seized $25 million worth of aluminum linked to a Chinese billionaire accused of stockpiling the metal across the world. The move is the most potent action yet by federal authorities probing whether U.S. companies connected to Chinese magnate Liu Zhongtian illegally avoided nearly 400% tariffs by routing the metal through other countries.

Click Here for Current Metal Prices

The same combination of domestic environmental and foreign trade imperatives already forced China to get serious about steel capacity closures. It is possible there could be a similar outcome in aluminum. In addition to higher aluminum prices due to supply cuts, we could see higher aluminum premiums due to the ongoing trade tensions, just as we saw the spread between domestic and international steel prices widen.

Alcoa Corp. reported higher-than-expected revenue in its first quarterly results after the metals company split into two in November, helped partly by a rise in alumina prices.

Click Here for Current Metal Prices

The producer of aluminum, alumina and bauxite also said it expects a 4% growth in global aluminum demand in 2017 even as the market remains modestly oversupplied.

Amazon.com Inc. is taking to the high seas.

The online retail giant has begun handling shipment of goods by ocean to its U.S. warehouses from Chinese merchants selling on its site — taking on a role it previously left to global freight-transportation companies, the Wall Street Journal reported.

Two-Month Trial: Metal Buying Outlook

The move marks Amazon’s latest step in a multiyear effort to build out its delivery business. The company doesn’t own or operate ships, but is openly acting as a global freight forwarder and third-party logistics provider, categories of companies that book space on ocean vessels and truck goods between ports and warehouses.

The demise of the primary aluminum smelting industry in the western world has been like a long, slow train crash. As this graph from CRU shows, the decline has been relentless, and although many reasons are cited for the closures of U.S. and European smelters, power costs and the resulting cost of production are a primary cause.

Source: CRU Group

According to North American trade group the Aluminum Association, since 2015 seven U.S.-based aluminum smelters — more than 60% of U.S. primary aluminium smelting capacity — have been curtailed or closed. Over a similar time frame as the graph shows, Chinese aluminum production has grown from 11% of global primary aluminum in the year 2000 to nearly 55% today.

Two-Month Trial: Metal Buying Outlook

The West has been surprisingly philosophical about the loss of smelting capacity, appearing to take the view that aluminum is such an energy-intensive product that the movement of smelters to low-power cost locations has a logical inevitability about it.

Where is Aluminum Production Going?

That argument holds true for the growth in the Middle East. Production in and around the cradle of civilization has jumped from 0.9 million metric tons in 1999 to an expected 5.7 mmt this year. But it hasn’t until recently had much logic for high-power cost locations like China. Even Beijing would appear to agree that power production and prices are sufficiently precious and high-cost that exporting primary aluminum is not a logical business model even for an export-orientated economy like China’s. Read more

Our January MMI report saw almost universal price pull backs in December, but that’s to be expected in a bull market with active investors.

The monthly MetalMiner IndX showed only moderate (less than 4%) price falls, even though they were visible across almost all the sub-indexes.

Click Here for Current Metal Prices

The price prospects for most of the metals we track remain strong and we have already seen some renewed price increases since we initially published our sub-index reports starting on the first of the year.

The Chinese economy and the strong dollar continue to power the metals bull market… at least for now. Happy new metals year!