aluminum price

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

Aluminum prices have risen around 15% since the beginning of the year.

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

The metal is currently trading at a two-year high, just below $1,950 per metric ton. A slow but steady rise.

The aluminum 3003-H14 Sheet price. Source: MetalMiner Price Benchmark.

This year’s rally comes as markets tries to price in Chinese anti-pollution capacity cuts next winter. 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.

Some would expect these producers to simply ramp up production ahead of the winter season to make up for lower output during the winter months, however China’s environmental crackdown is already affecting producers as inspection teams visit aluminum smelters on a regular basis to keep production in check.

Global Political Heat

It’s ironic that just as China tackles overcapacity in the form of an environmental clampdown, international pressure on China is rising.

In mid-March, global aluminum associations released a joint letter in advance of the upcoming G20 summit calling for the creation of a Global Forum to address aluminum overcapacity. This is the first time that a global coalition of aluminum producers has called for such an effort to address Chinese overcapacity in the marketplace. Steelmakers have already gone the G20 appeal route to deal with Chinese overproduction in their industry.

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Last year’s G20 resulted in the creation of a Global Forum on steel excess capacity in order to increase information sharing and cooperation. Aluminum associations hope to create the same thing for aluminum this year. Earlier this month, The Aluminum Association, the trade group for North American primary smelters, filed a petition seeking anti-dumping duties on aluminum foil.

What This Means For Metal Buyers

Aluminum markets are in a bullish mode since we called a bull market last year. Rising political tensions, an environmental clampdown in China and rising raw material costs are three key reasons to believe in this aluminum bull market. Industrial buyers should minimize their commodity risk exposure accordingly.

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Speaking at S&P Global Platts’ recent Steel Markets North America conference, noted trade attorney Alan Price of the Washington law firm Wiley Rein said the World Trade Organization case that the federal government filed on behalf of aluminum producers against Chinese overproduction of the light metal in January, will essentially serve as a guide for other industries looking to challenge state-subsidized companies’ overproduction for export in the People’s Republic.

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“The solutions to Chinese overcapacity are to follow the money and see who’s subsidizing it,” said Price, who has represented several U.S. industries in anti-dumping and countervailing duty legal actions against Chinese producers, as well as WTO disputes. “China has not fundamentally reformed its excess capacity. The rest of the world’s production has remained stable, but the explosion in Chinese capacity is still there.”

Alan Price

Alan Price, image courtesy of Wiley Rein

Price said the aluminum case fundamentally attacks the mechanism China uses to back up failing businesses, the availability of subsidized money in China known as “money for metal” on the municipal, state and federal level there.

“The WTO case involving aluminum, challenges, fundamentally, the Chinese subsidization system,” Price said. “It goes after the financial systems of China and how everything is financed. In aluminum you can track all the companies involved. There are around 10 and it’s a much more understandable beast, much more understandable problem than the vastness of the Chinese steel industry. This case will fundamentally decide if China will be allowed to prop up failing businesses.” Read more