Javier Ruiz
By Sohrab Darabshaw
Things may appear better in China than they are, at least as far as the country’s metals and minerals markets are concerned. However, China still remains the go-to destination for European steel and aluminum supply.
Energy-sensitive European factories and aluminum smelters remain stranded due to the ongoing Russian-Ukrainian war. Western Europe’s gas and electricity supplies are suffering the brunt of the economic retaliation thus far. Restrictions and supply problems have already led to several price hikes, increasing doubts about supply sustainability in the near future. Some smelters are actively talking about stopping production altogether.
Incidentally, Russia’s Rusal (OTC:UNRIF), the world’s largest aluminum producer outside of China, accounts for 6% of the global output. To add to the problem, China, one of the largest consumers of steel, coke, and aluminum in the world, has cut down on imports, including aluminum.
Aluminum Supply in China Still in Contrast to Europe
Continuing with the July trend, Chinese imports of aluminum continued to slide in August. According to data made available by the Customs Dept., China’s August aluminum imports dropped 19% from a year earlier. Experts say this reflects lowered import appetite amid record-high domestic production and tight overseas supply.
The General Administration of Customs says China imported 200,440 tons of unwrought aluminum and products throughout August. This figure also includes primary metal and unwrought, alloyed aluminum. On the other hand, the country, which is both the world’s biggest producer and consumer of the metal, produced 3.51 million tons, representing a new record.
Leading Slovak aluminum producer Slovalco, owned by Norwegian Norsk-Hydro (OTCQX:NHYDY), is on the verge of halting production by September’s end. Last weekend, Aldel, which is the Netherlands’ only primary aluminum producer, said it was planning a similar move. Even as far back as last December, the largest aluminum producer in eastern Europe, Romanian Alro Slatina, announced the closure of three of five production lines.
Aluminum has great strategic importance for Europe. After all, the light but durable metal sees use in everything, from cars and packing to medicines and green power. European producers are now actively looking to China for their aluminum needs, even though the country’s supplies are of a slightly inferior grade. Amid a worsening energy crisis, China remains one of the only options.
Predicted Effect on Aluminum Prices
This situation continues to impact aluminum prices wholly. On the LME (London Metal Exchange), prices now range between US $2,350 and $2,450 per ton. These numbers are quite a decline considering they briefly touched a high of $3,877.50 as recently as March of this year.
That said, China’s COVID-19-related lockdowns and heat waves have also affected demand. According to one estimate, overall demand contracted by 5.9% year-on-year in Q2 2022 against a production growth of 3.9%. Recently, unprecedented heatwaves in various provinces also struck a blow to demand. Coupled with unexpected power shortages, these have become a major hurdle for aluminum production.
Currently, many still hope that the country’s latest bout of fiscal stimulus measures designed to revive the economy will eventually bear fruit. Nonetheless, LME analysts predict aluminum prices of US $2,650/2,600 per ton in FY2023-24E.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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