Aluminum on the London Metal Exchange has been trading broadly between $1,700 and $1,750 per metric ton for much of the fourth quarter. Maybe not to the same extent as copper or zinc, but aluminum along with most of the base-metal sector benefited from renewed investor interest as 2016 went on. Although net long positions have been trimmed back following some recent significant deliveries into LME warehouses, the consensus remains positive regarding prices for 2017. Read more
The Obama administration also launched a formal complaint Thursday against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry.
The move against the stockpile of aluminum connected to Chinese billionaire Liu Zhongtian, the owner and CEO of aluminum company China Zhongwang, is the strongest action yet by federal authorities probing whether U.S. companies connected to the Chinese magnate illegally avoided nearly 400% tariffs by routing the metal through other countries.
An aluminum stockpile like this one has been seized by Homeland Security.
We previously reported the whereabouts of the aluminum stockpile as it curiously moved around the globe. China Zhongwang has denied any connection to the stockpile or its movements, but hundreds of shipping containers of aluminum were seized this week by the Department of Homeland Security. The containers are owned by Perfectus Aluminum, Inc., a California company founded by Mr. Liu’s son, Liu Zuopeng. Perfectus is now run by one of Liu’s close business associates, Jacky Cheung, who runs several companies with connections to Liu.
Homeland Security is conducting laboratory tests on the aluminum to determine whether the metal is restricted under U.S. law, according to federal court documents. The seized aluminum is in the form of pallets and court records don’t state which company manufactured the aluminum. The WJ saw shipping records which show that a separate company called Peng Cheng — which later became part of Perfectus in a merger—imported the metal from an affiliate of China Zhongwang in 2013 and 2014.
Homeland Security and the Justice Department are investigating whether the companies committed criminal or civil violations that could include smuggling, conspiracy and wire fraud. The WSJ reported that Homeland Security agents have also questioned former employees of the companies associated with Liu, according to people familiar with the investigation.
WTO Case Against Chinese Aluminum Subsidies
As for the subsidies case, the U.S. Trade Representative‘s office said in a formal complaint that China’s actions in the aluminum sector violate WTO rules prohibiting subsidies that cause “serious prejudice” to other members of the trade body. Read more
After surging in November, base metals fell across the board in December. That selling pressure spread into aluminum markets, limiting any upside moves into the year-end. Prices however didn’t give that much ground as aluminum’s fundamental story remains rather bullish. The drops look a lot like classic profit-taking.
The auto industry is a key driver of aluminum demand. Auto sales in US and China (the world’s biggest car market) finished the year on a strong note. Total vehicle sales in the U.S. hit an 11-year high in December, aided by a fourth-quarter surge in demand that exceeded expectations. In China, car sales hit an all-time record in November, up 17.1% year-on-year.
Although the figures came in strong, they should be taken with a pinch of salt. In the U.S., cars were sold at an average 10% discount off the original asking price and that’s an incentive level not seen since the beginning of the financial crisis. Similarly, in Q4, China announced a 50% cut in its sales tax on automobiles with small engines. The tax cut was effective only until the end of 2016 although some analysts expect China to extend the tax cut into next year.
One of the factors supporting higher aluminum prices has been that there were fewer smelter restarts than expected smelter in China. In addition, we foresee limited additional restarts this year due to rising production costs and pollution issues in China.
First, alumina seems headed for a supply deficit this year following Chinese curtailments. Second, coal prices have surged since China reduced the hours for workers in its coal sector, supposedly in a bid to control pollution and curtail its excess industrial capacity. Truth be told, though, China really relaxed the mining day norm simply to control skyrocketing — some would say artificially high — prices. However, we expect the maneuvers will keep China’s supply of coal and aluminum in check this year.
For years, China’s cities have been choking on the smog spewing from China’s industrial production sector but things have recently gotten much worse. Two weeks ago, 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. Given that coal burning is the biggest contributor to air pollution in China, industrial metals supply could shrink this year, particularly steel and aluminum.
What This Means For Metal Buyers
The massive existing overcapacity and questions regarding China’s ability to maintain its rate of growth are the main factors that could spoil the party for aluminum bulls. However, for the reasons explained above, it seems early to make a call on that. We still see upside potential in aluminum prices.
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To begin 2017, aluminum prices inched higher with the U.S. dollar retreating and traders awaiting clarity on the market.
According to a recent report from the Economic Calendar, downward pressure on aluminum has been the story since December, but over the course of 2016 the metal saw a 13% increase. The reason? falling supply with the closure of capacity while demand grew as the result of China’s infrastructure initiatives.
Donald Levit, writing for the Economic Calendar, said: “Even though it is typical for aluminum prices to retreat in late fall and winter, prices held steady through mid-December after Donald Trump won the U.S. presidential election in November. Trump made a campaign promise to move to further stimulate the U.S. economy, and that stimulus could potentially include infrastructure spending. That would boost aluminum demand.”
What does 2017 have in store for aluminum prices? Volatility could be the word with traders attempting to assess how the market will evolve as the year progresses.
The Auto Industry and Aluminum
Our own Raul de Frutos echoed the sentiments of aluminum’s struggles in December after a 2016 of growth. But what does the auto industry have to do with it? Raul writes:
“The auto industry is a key driver of aluminum demand. Auto sales in US and China (the world’s biggest car market) finished the year on a strong note. Total vehicle sales in the U.S. hit an 11-year high in December, aided by a fourth-quarter surge in demand that exceeded expectations. In China, car sales hit an all-time record in November, up 17.1% year-on-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:
India is becoming a growing powerhouse in the base metals industry and — although producers seem more intent in expanding outside the country, witness Aditya Birla’s smart acquisition of Novelis — the country has the two significant advantages that encourage an expectation of rapid domestic growth. These are low current per capita consumption and the world’s fifth-largest domestic reserves of bauxite.
Obstacles to India and Base Metals
Assured rapid domestic growth is not a slam dunk, though. Power costs in India are high and competing demands for power in a country with a severe shortage of generating capacity mean refiners have to build their own captive power stations to ensure continuity and price competitiveness.
Both mining and plant construction then run into problems of land ownership and poor supporting infrastructure. Both issues that could be addressed if there was the political will and, as such, can be said to be self-inflicted. That’s cold comfort to producers struggling to get projects approved and developed on budget. So, maybe, it comes as no surprise that producers have been lobbying hard for protection against imports.
Sources: Bloomberg and World Bureau of Metal Studies
According to industry sources quoted by the Economic Times of India, imports of aluminum have increased by 159% in 2015 compared to 2011 levels. Possibly more worrying for the industry is that the country is importing more than 50% of aluminum consumed. While India has annual aluminum consumption of 3 million metric tons, half of that is supplied by imports. India’s production capacity is 4 mmt. Read more
No greater debate has ever roiled our virtual pages than the one about Ford Motor Company and its use of the term “military-grade aluminum.” This post from last May is just one of several posts we have written about Ford’s ad campaign for the aluminum-bodied F-150 pickup and all not only rank high in our site stats but also seem to draw the most commenters willing to lend their expertise that, mostly, rejects Ford’s use of the term.
Enjoy this look back and feel free to post if you have any strong feelings about “military-grade” yourself as we look back at the year that was. — Jeff Yoders, editor
No term has brought up more discussion in the pages of MetalMiner than Ford Motor Company‘s insistence that the F-150 pickup truck is made of “military grade” aluminum.
On this Memorial Day, we thought we’d revisit whether military grade was actually a specification or a simple marketing ploy on Ford’s part. Since the aluminum-bodied F-150 was introduced in the 2015 model year, more information about its actual construction has been shared by Ford.
Individual dealers are now touting the strength and research that went into the cab and other body parts of the F-150. “Military grade” is still sprinkled throughout the the video, but they also concede the alloy is also part magnesium and silicon. Ford also mentions that a large portion of the F-150 is, in fact, high-strength steel.
Ford has also admitted that the F-150 is primarily built from 6,000 series aluminum alloy, the strength of which is increased by heat-treating after it is formed.
The “military grade” refers to the specs that military applications of 6,000 series alloy is used in. In fairness to Ford, manufacturers and fabricators have been promoting their products as “military grade” for decades, and that’s really no different than Ford’s use of the term.
We certainly wouldn’t recommend that anyone take an aluminum-bodied F-150 into a war zone to test just how “military grade” it really is, but, from a specification standpoint, Ford seems to have good reason to be proud of the rigor of the processes it uses to produce the F-150.
Domestic aluminum and zinc prices in China have been supported this year by a doubling in coal prices, due to a perception that higher coal prices lead to higher energy prices and directly translate to higher energy intensive metal prices.
China’s central government probably feels it has little alternative than to rationalize thermal coal production which, a year ago, was suffering from some 2 million metric tons of overcapacity. The irony is that investment in coal mines would fall if the government would trim plans for new coal-fired power stations.
Is Coal-Fired Capacity Actually Decreasing?
Yet in a market which has seen the world’s largest investment in renewable energy, Greenpeace is quoted in the Guardian newspaper saying China is adding two new coal power station projects each week across 10 different provinces. The environmental campaign group estimated in July that China already has up to 300 gigawatts of excess coal-fired capacity with another 205 gw under construction and plans for an additional 405 gw. As of July, China already had 895 gw in coal-fired power stations representing more than half its electricity generation London-based Carbon Tracker is quoted as saying. Read more
Something that has concerned aluminum investors throughout the year is the potential increase in Chinese aluminum production. However, restarts seem to be less than what the markets were expecting earlier. Rising costs of production will likely limit additional restarts.
China’s clampdown on coal mining and supply disruptions in Australia has led to a spike in seaborne coal prices. Thermal coal prices in China have more than doubled this year. In addition, alumina, which is then processed to produce raw aluminum, has risen steeply in price over the last couple of months.
Meanwhile, even the most pessimistic estimates put the annual demand growth rate at about 4%. Not only that, but Chinese aluminum demand has been better than expected. Chinese demand from infrastructure and construction has been robust this year. The automotive sector, another big industry for aluminum demand, continues to look strong.
In October, China’s passenger car sales rose 20% from the same month last year, the sixth consecutive month that car sales have risen by double digits in China. Last year, China announced a 50% cut in the sales tax for cars with small engines to last until the end of this year. Some analysts expect that China will extend the tax cut to next year but if that’s not the case, we could see some moderation in China’s car sales numbers.
Adding to the bull case for demand growth in China is the expected boost in U.S. infrastructure spending following republican nominee Donald Trump’s election victory. During the second half, aluminum prices took support above $1,600/mt from better-than-expected Chinese demand combined with lower-than-expected Chinese output. Trump’s election is helping fuel a rally across the industrial metals complex. It wouldn’t be a strange thing to see aluminum prices comfortably trading above $1,800/mt in 2017.
On another note, recently a massive stockpile of 500,000 metric tons of aluminum has been trucked out of the Mexican city of San José Iturbide and shipped to a remote port in Vietnam.The Wall Street Journal reports that the stockpile is believed to be related to the product of Chinese aluminum producer China Zhongwang. We don’t see this news impacting prices immediately but news like this could potentially bring up the case for increasing trade barriers between China and the U.S., especially under the lead of Trump, who has vowed to bring more jobs back home during his campaign.
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Long row of rolls of aluminum in production shop of plant.
In a year that saw most industrial metals rally to record highs, aluminum has lagged behind. The reason? Oversupply.
According to a recent report from The Wall Street Journal, citing data from the International Aluminum Institute, global aluminum production grew to a record high of close to 5 million metric tons in October. It’s expected aluminum will continue to fall behind other metals in 2017 in terms of price growth as a result of oversupply.
“As we expect to see further production increases in the next few months, a record-high quantity of aluminum is likely to be produced on a whole year basis,” states a Commerzbank report, according to the WSJ.
Chinese Aluminum Producer Moves Its Supply
Our own Raul de Frutos recently reported on a significant stockpile of 500,000 metric tons of aluminum that’s been shipped from Mexico to Vietnam. What will its impact on price be?
“Although the volume is pretty big, it’s immediate impact on global aluminum prices will likely be none. This is because the metal has already been produced and it’s just moving from one place to another before its final use. The metal is already there and it’s going to be consumed whether it is in the U.S. or in another country. Therefore, it’s all already factored into the price,” de Frutos wrote.
How will aluminum and base metals fare for the remainder of 2016 and into 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:
Renewed economic confidence followed the election of republican nominee Donald Trump and Americans snapped up new vehicles at a rapid pace in November, giving the U.S. auto industry a chance of breaking its all-time record for full-year sales.
In November, U.S. auto sales rose 3.7% compared with a year ago, according to Autodata Corp. On an annualized basis, that equaled a rate of 17.87 million units. November sales growth projections had ranged from 2.7% at Edmunds.com to 4.2% at Kelley Blue Book. Total sales for November were 1.38 million, that shattered a record for the month that was set in November 2001.
The month’s annual sales rate, adjusted for two extra selling days this November, was 17.9 million vehicles, more than the 17.7 million average estimate.
A contributing factor to the solid month was the Thanksgiving weekend and Black Friday sales, which are having an increasing effect on the month’s output. With one month to go, the auto industry has a decent chance to match or exceed its 2015 full-year record of 17.47 million vehicles sold.
Automotive sales and metals prices are both benefiting from bullish sentiment among buyers and investors. Steel companies stock prices have increased after Trump’s election just as aluminum and copper prices in the bullish metals markets.
Another factor in new car sales is the enduring low prices for both oil and gasoline, which might change soon now that the Organization of Petroleum Exporting Countries and other producers such as Russia have finally agreed to a production freeze.
Rising oil prices, however, might not be the detriment to auto sales that they have in the past. Hybrid vehicles and simply more efficient fuel consumption have blunted the impact of gasoline prices on new car sales. One of the reasons that the gas tax has become such a poor funding mechanism for the federal Highway Trust Fund is that motorists simply have to buy less gas for today’s efficient, newer vehicles.
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