Aluminum prices declined overall in May. However, near the end of the month, they appeared to hit bottom and began to trade sideways. Conflicting macroeconomic and geopolitical factors continue to pressure markets, resulting in unclear direction and price trends.
Shanghai Lockdowns Return, Compounding Uncertainty
Shanghai’s reopening proved short-lived as the city stumbled back into lockdown this week. Following a surge in COVID cases, restrictions and mass testing are returning to most areas of the city. Shanghai first went into strict lockdown in late March to quell a major outbreak. Currently, officials intend to release areas that test negative from lockdown. Those that test positive will remain quarantined.
China remains unwavering in its COVID-zero commitment. The impact of this most recent setback remains unknown. It will likely depend on how long and how expansive the lockdowns become.
As cases rebounded almost immediately after Shanghai began reopening, the risk for subsequent lockdowns there and in other cities remains high.
China’s COVID Policies Still Squeezing Aluminum Prices
As long as Chinese demand remains muted, we can expect aluminum prices and market movements to be affected. During the initial stretch of Shanghai’s lockdown, manufacturing activity plummeted. This caused China’s demand for aluminum to plummet too.
According to the latest numbers, imports of unwrought aluminum and aluminum products fell 11.1% from March to April. They also dropped 37.7% year over year. Meanwhile, output appeared largely unaffected. In fact, the average daily and total monthly production of primary aluminum hit record-highs in April, aided by the relaxation of power curbs.
China’s boost allowed global aluminum production to hold firm year over year during the month. It was a surprising result given the tightness brought on by the Russian invasion of Ukraine. However, as supply outpaced demand in China, bearish sentiment climbed, and global aluminum prices slumped.
With Shanghai’s restrictions returning, markets will likely begin to price delays into China’s overall recovery.
LME Inventories Fall While WTI Crude Climbs
As Chinese demand continues to experience holdups (however temporary), falling LME warehouse inventories and soaring energy prices add competing pressure to the upside for aluminum prices.
For example, inventories saw an 18.5% month-over-month drop at the end of May. On top of that, average inventory levels during the first five months of 2022 sit 55.34% beneath where they were in 2021. Of course, stock levels do not necessarily translate to a movement in prices. That said, consistent declines on top of falling European production levels may very well add friction to any fall in aluminum prices.
Energy prices also continue to climb. Indeed, WTI crude oil prices closed May more than 71% above the year prior. During the early days of June, prices increased beyond the $120/barrel mark, and they remain unlikely to subside in the near term.
In its most recent (and punitive) round of sanctions, the EU agreed to ban as much as 90% of Russian crude oil imports by the end of 2022.
Meanwhile, according to European Commissioner Valdis Dombrovskis, China continues to purchase Russian oil at a 35% discount. India, likewise, has stopped short of cutting off Russian energy supplies.
Nonetheless, the EU’s recent decision will leave a growing number of countries vying for energy produced elsewhere. As a result, aluminum production and input costs will continue to see pressure.
CME Aluminum Futures Contract Builds Momentum
The LME nickel contract experienced the most direct and substantial fallout from the historic March nickel crisis. However, the reputational damage to the exchange has begun to permeate through to other metals.
The average daily volume for Aluminum futures on the Chicago Mercantile Exchange hit an all-time high in May with a 138% year-over-year jump. Open interest likewise increased 158% during that same period. Meanwhile, on the LME, open interest fell over 14% from March 8 to the end of May.
Thus far, aluminum has not yet faced the same loss of liquidity as nickel. There have also been few issues with volatility or price discovery. Nonetheless, this could indicate the beginning of a gradual shift between the two exchanges as a result of the crisis.
Since March, the CME Group has increasingly looked to capture disillusioned traders from the LME. Momentum is building in aluminum futures. That’s why the exchange also launched aluminum options on May 23. Despite these efforts, the LME remains the leading global exchange for industrial metals by a wide margin.
By AG Metal Miner
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