By Raul de Frutos
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 (OTC:CHZHY).
Zhongwang is a state-supported enterprise that has received large benefits and financing from the government of China. The company also has a long history of circumventing and evading duties in trade cases.
Among other allegations, Zhongwang was accused of exporting extrusions from China and remelting them back into billet in other countries, including Mexico, in order to later sell this metal in the U.S. market as primary aluminum.
With so many controversies over the past few years, the story of this company smells like a rat, to say the least. However, the purpose of this post is not to determine whether or not the company is guilty of taking illegal importing actions, but to discuss what could be the price impact of this moving stockpile.
The Aluminum Price Impact
It is estimated that in 2014, the world produced nearly 50 million mt of aluminum. Given this number, the named aluminum stockpile accounts for less than 1% of the annual global supply.
Although the volume is pretty big, its 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 already factored into the price.
However, when producers discuss production plans, pricing could be impacted. For example, when a company announces a big increase or decrease in production such as when Glencore (OTCPK:GLNCY) announced its plans to slash its zinc production by 500,000 mt. That did have an impact on prices as the market needed to factor in the future supply deficit.
Although I don't expect this news to have an immediate impact on aluminum prices, it could have a bullish impact down the road. Zhongwang was already under U.S. investigation for allegedly dodging import duties of as high as 374%. Now there are rumors that the company might have links to this huge stockpile.
President-elect Donald Trump vowed to bring more jobs back home during his campaign, and given the ongoing controversies, Zhongwang might be one company he looks at first. If that's the case, China's largest and the world's second-largest aluminum extrusion company could potentially see its export margins shrink.
Therefore, that's the potential bullish case that news like this one can develop into: Higher trade barriers can turn into supply cuts as international producers lose profitability in their export business.