The Aluminum Price Forecast: China Is Coming

The Aluminum Price Forecast: China Is Coming

D. Lentz/iStock via Getty Images

By Stuart Burns

Don’t worry – this isn’t another “reds-under-the-bed” story. Rather, it’s a look into how Chinese aluminum semis are quickly becoming the market’s main price setting (at least in Europe). With Russia more or less out of the picture and domestic mills booked up for months, China is the only swing producer with capacity to spare. How will all this affect the aluminum price forecast? It’s a conversation many industry insiders are having.

Increased Costs And Limited Capabilities

The current European marketplace is so tight that UK consumers simply accepted March’s 35% import tariff on Russian deliveries. This underscored just how few alternatives were available at the time, and now there are even more sanctions on the way. See below for current aluminum prices of 5251 semis:

European aluminum prices

Source: MetalMiner Insights

Both consumers and distributors are hesitant to place new orders with Russia. Some are obviously acting in support of Ukraine. Others, meanwhile, are more anxious about the supply chain risk. Indeed, the ability of Russian mills to deliver in the coming months remains highly suspect. This means that even those consumers willing to stomach the price increases still need to consider the possibility of extensive delays.

China’s Aluminum Production Is Way Up

China has spare semi-finished production capacity. The country also has a recovering primary metal smelting sector with better availability of power supplies. This is especially true with winter ending and environmental controls relaxing. Even Yunnan province, still reeling from drought, is issuing more power permits.

In a recent Global Aluminum Production note, Capital Economics detailed how the current marketplace affected overall output. For instance, in March, global aluminum output fell by 1.5% y/y. The primary reason was high power costs, which kept a lid on production growth.

However, Chinese Aluminum output actually improved during this time. From February to March, the country advanced from -3.2% y/y to -2.1%. In terms of m/m, this represents a massive 11.6% growth. One has to assume the county could have performed even better had COVID-19 lockdowns not thrown a wrench into the machine.

Going forward, Capital Economics expects the ongoing lockdowns to similarly affect April’s production output. However, they went on to say that the situation should ease as Q2 unfolds.

Supply, Demand, and the Aluminum Price Forecast

The only growth in primary aluminum output has been in the Middle East and Asia, where power costs are relatively low.

Aluminum output

Source: Capital Economics

Meanwhile, a recent annexure (Annex XXII) to the EU’s 2014 Regulation No. 833 suggests imports of Russian-made aluminum into the EU could be banned this month. Still, details remain sketchy at this point. For now, current contracts will be permitted through Q2.

The change could pave the way for further restrictions, which could affect the shipments of Russian metal leaking over the East-West border. Many of these supply lines are being held up via Russian trucks crossing into Belarus and then the EU. Though so far immune to the EU ports ban on Russian ships, a hold on payments to Russian suppliers would put an end to these efforts.

There’s no denying that many consumers expected the aluminum market to soften this year. After all, 2021 year-end contract negotiations had many consumers reluctant to fix full-year prices. The expectation, of course, was that metal prices and conversion premiums would ease after H1. In reality, conversion premiums are remaining stubbornly high, even as the LME has backed off those March peaks.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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