By Stuart Burns
Aluminum has had quite a depressing month.
A flood of Chinese exports, weak demand and robust Western supply in spite of earlier smelter closures have all contrived to leave the market in primary surplus. As such, MetalMiner's monthly Aluminum MMI®, tracking aluminum prices across the globe, registered a value of 86 in June, a decrease of 4.4% from 90 in May.
China's aluminum output rose to a record 2.59 million tons in April, according to the National Bureau of Statistics. The world simply can't rely on China to restrain output. Prices might need to fall further in order to cause further non-China closures to balance the market. Rusal cited the rising tide of Chinese aluminum exports as a main concern in the producer's first quarter earnings report, which could increase in light of China removing a 15% export tax on aluminum products.
In the absence of demand from the financial sector, both the LME/CME price and physical delivery premiums have been falling, particularly in Asia.
Aluminum Premiums for Physical Delivery: Takin' a Dive!
As I wrote on the blog recently, Reuters reported this week that premiums have dropped to $100-110 per metric ton for in-warehouse Singapore metal, down from $150 two weeks ago and $400 in December. In South Korea, May tenders were said to be awarded at $135-145 per metric ton and the country is sitting on nearly half a million tons of primary metal inventory. Premiums have dropped in Europe and North America, too, but are said to be stabilizing for the time being, although most are expecting further falls in North America.
Interestingly, the LME has returned to a healthy forward price curve, as it did in times of plenty from 2009-2014 when the stock and finance trade flourished, soaking up excess supply.
Source: London Metal Exchange.
With such a strong forward curve and low interest rates, all it needs is a little appetite from the hedge funds and banks, with some encouragement from warehouse companies to store metal, and bingo! Excess inventory rapidly gets sucked up into long-term storage.
According to Reuters, some warehouse companies are starting to offer incentives or discounts on storage costs of around $70 to draw in metal. The foundations are in place for a pick-up in stock and finance activity, and the possibility that "demand" created by that activity could support premiums at least at or around current levels and potentially, at least in Asia, raise them up.
Most are expecting LME prices to fall further. It is entirely possible LME prices could fall while physical delivery premiums could rise. That was exactly the situation we had in 2012-13 and the LME changed its rules to avoid it. The next six months could test the system, let's see.
What It Means for Semi-Finished Aluminum Markets
The combination of lower LME prices and falling physical delivery premiums have allowed producers of semi-finished products to chase a weak market down, a process hastened by rising supply from China.
Semi-finished product makers' conversion premiums have also been soft in the face of a well-stocked distribution market and slack end-user demand, a situation that, as we enter the summer period, is unlikely to turn around before the fourth quarter.