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LONDON, July 19 (Reuters) – Aluminum has been one of the best performers since the start of the year among industrial metals thanks to a strong recovery in pandemic demand and production brakes in China, the world’s largest producer.
The London Metal Exchange (LME) price CMAL3 has lost some of its bullish momentum since hitting a three-year high of $ 2,603 a tonne in May, but at $ 2,450 currently it is still up a fifth since early January, a performance eclipsed only by tin.
However, when some of the heat leaves the futures market, it is transferred to the physical supply chain.
The premiums, which a physical buyer pays in addition to the spot price of the LME, increase. The CME Midwest US premium has hit record highs above $ 660 per tonne, meaning a local manufacturer is paying an aggregate price above $ 3,000 per tonne. (https://tmsnrt.rs/3iFFxPB)
The trigger for the latest premium hike is the imposition of an export tax on Russian aluminum, a key source of supply for European and US markets.
However, this premium storm has been developing for some time and reflects tectonic changes in the global aluminum market.
Russia intends to levy a tax on the country’s exports of steel, nickel, copper and aluminum from August to December.
Aluminum will be subject to an export tax of 15% or a minimum of $ 254 per tonne, whichever is greater.
The measures are expected to bring in up to $ 2.3 billion, which will be used to mitigate the impact of high world prices on the country’s downstream metals sectors.
However, consumers everywhere will be affected as Russian producer Rusal 0486.HK last year produced 3.8 million tonnes, or about 6% of the world market.
Physical premiums surged following the June 28 announcement, the US Midwest CME contract up 10% and the European duty-paid contract up 45% to $ 362 per tonne.
This tells you that the market expects Rusal to be able to pass at least part of the export tariffs on to customers.
Some sort of divide between producer and consumer is the most likely outcome, according to analysts at Citi, who expect the US premium to peak at around 35 cents per pound ($ 772 per tonne). (“Commodity Market Outlook Q3 2021”)
The big question is whether the Russian authorities extend beyond December what is currently presented as a windfall tax on windfall profits of local metal producers.
Unless world prices collapse by then, the rationale for the tax – to protect domestic consumers – will remain unchanged, as will the Russian Treasury’s enthusiasm for a new source of revenue.
FRACTURED SUPPLY CHAINS
The current bullish storm in the physical aluminum supply chain echoes a similar upheaval in 2018, when Russia’s aluminum supply was threatened with US sanctions and then lifted.
The premium for the US Midwest rose to $ 450 per tonne, which at the time seemed unprecedented, even taking into account US import tariffs of 10%.
The more marked reaction of premiums this time around reflects the exhaustion of the American and European markets compared to three years ago.
The United States in particular is struggling to attract enough units to fuel booming demand. Imports from Canada are capped by a quota – the quid pro quo for duty-free status – and a dysfunctional global freight market hinders the flow of metals from other producing regions.
It also makes these flows more expensive to ship, thus contributing to another factor of structural premium increases.
The United States and Europe are naturally loss-making markets for aluminum and the current lack of containerized freight capacity could make it “islands” in the global supply chain, according to Citi.
Part of the problem for US and European manufacturers is that the axis of global inventory has shifted during the pandemic.
Excess metal during the global financial crisis accumulated in Detroit and the Dutch port of Vlissingen. This crisis saw the spare metal migrate to Asia.
LME’s warehouses in the United States currently hold 40,975 tonnes of aluminum, or just 3% of the exchange’s global network of 1.46 million tonnes. The European establishments of the LME hold 101,125 tonnes, or 7%.
Everything else is in Asia, particularly Port Klang in Malaysia, which holds 868,100 tonnes and is also the location of a 168-day loading queue, another cog in the premium bull machine.
The distribution of stocks registered in the LME is reflected in the ghost stocks of the exchange. Metal stored off-market but with the exchange delivery option included in the storage contract stood at 869,875 tonnes at the end of May. Asian locations accounted for 85% of this tonnage.
The movement of accessible global inventory to Asia was driven by changing dynamics in China, the world’s largest user and producer of aluminum.
Historically a net exporter of semi-finished goods, China has been tapping international markets for both primary metals and alloys since it first emerged from the COVID-19 lockdown in the second quarter of last year.
China’s giant production sector is hit by smelter cutbacks in Inner Mongolia and Yunnan due to energy caps and low hydropower capacity, respectively.
As Chinese leaders chart a course for carbon neutrality by 2060, such pressures on China’s production base, largely fueled by coal, are expected to increase.
The same is true of its base metal imports, which is why so much aluminum has moved to locations within easy sailing distance of major Chinese ports.
The relative reduction in inventory coverage for consumers everywhere else has made them extremely vulnerable to the current rolling freight disruption.
The surge in premiums reflects this new reality in the aluminum market.
Premiums are going to remain very volatile simply because of the large number of disparate factors that have combined together over the past year.
The most fundamental problem for buyers, however, is that aluminum is starting to behave like a market with a structural supply problem. And for the first time in two decades, this problem is not that of China’s excess production.
Russian export tax adds to perfect storm for aluminum bountieshttps://tmsnrt.rs/3iFFxPB
(Edited by Kirsten Donovan)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.