Aluminum consumers have watched the primary ingot price drift gradually lower since the beginning of this year.
There have been peaks and troughs, of course, as the price is buffeted by trade news, mill outages or exchange rate movements.
Broadly speaking, however, our sideways market has been one of gradual decline.
As the price approaches the psychologically significant $1,700 per metric ton level, some will be wondering: can we expect resistance and a floor, or could prices continue down?
I wish we had a crystal ball, but you will not be surprised to hear if I did, I wouldn’t be sharing the results.
In the absence thereof, we can look to the trend and fundamentals to try and discern what the rest of the year may bring.
Normally at this time, environmental concerns in China — most notably smog due to power generation, heating and industrial activity — would be driving enforced plant closures that would be supporting prices.
However, a Reuters article quotes Bank of China analyst Xiao Fu, who says winter production curbs in China are likely to be more moderate than last year and provide less support for prices.
In something of a perfect storm, the demand outlook in top aluminum producer China is weak. Industrial activity is contracting in China and neighboring Japan – by far the two largest aluminum consumers in the region.
Reuters also reported physical delivery premiums for aluminum shipments to Japan for October to December were set at $97 per ton, down 10% from the previous quarter. The drop comes amid ample supplies in Asia and softening demand from the electronics and auto industries. This figure is said to be lower than producers’ initial offers of $105-$115 and lower than the $108 per ton paid in the July-September quarter, marking the first quarterly drop in three quarters.
Apart from ample supply and weakening demand, what else is impacting the price?
Well, the dollar isn’t helping.
The greenback is broadly at its strongest since 2017; a strong dollar, as we all know, depresses commodity prices.
Support has also been lacking on the cost side. Alumina prices have halved since last year’s peaks, Reuters reported. At $294 per metric ton, the alumina price is at its lowest since June 2017, removing a source of discipline for smelters to cut output due to margin pressures.
Meanwhile, while output has fallen slightly, the market rightly sees this as due to specific production outages; this year’s 0.5% contraction is forecast to switch to a 5% increase next year, according to CRU.
Supply is likely to continue to outstrip lackluster demand; therefore, that $1,700 per ton support level is looking increasingly fragile.
by Stuart Burns