Aluminum prices broke out of their sideways trend last month with strong upside price action. Prices rallied during the first half of November, followed by a modest retracement before they continued upward.
Overall, the Aluminum Monthly Metals Index (MMI) saw a modest 1.04% increase from November to December.
The End of zero-COVID Sees Prices Reverse
At the beginning of November, China appeared to waver between easing virus control measures and the continuation of zero-COVID. The possibility of China reopening, even if slowly, saw base metal prices rally. Unfortunately, the subsequent return of lockdowns soon caused prices to retrace. By the end of November, however, protests triggered yet another policy reversal from Beijing. In an act of appeasement, the government lifted lockdowns despite rising case counts. Metal prices responded bullishly and resumed their respective uptrends. For aluminum prices, that translated to a 9.61% rise between November and December.
Markets appeared quick to price in the return of Chinese demand, though much of this is speculative. Historically, China consumes around half of all commodities. Unbridling its consumers and putting an end to the havoc-wreaking disruptions of lockdowns could cause demand to increase. To what extent and at what pace Chinese demand will return remains unknown, however.
Aluminum Prices, Oil, and the Reality of China Reopening
China remains plagued by both immediate and long-term issues. In the short term, the end of zero-COVID appears easier said than done. Experts have warned of an “exit wave” that could easily overwhelm the state healthcare system. The public faces the additional risks of low vaccination and overall exposure rates due to the strong virus control measures over the last three years.
COVID is now largely untethered throughout China. Of course, any backtracking on the State’s part to mitigate its spread appears politically nonviable. For aluminum prices, the reality of China’s pivot will likely mean increased volatility until things stabilize over the next few months. Until this point, true market conditions will remain elusive.
Aside from aluminum, China’s reopening will also mean the return of its energy demand. This could trigger a forthcoming reversal for WTI crude oil prices, which have largely remained in descent since June. Up to this point, the energy crisis has centered on Europe and resulted in extensive cuts to European aluminum capacity. Unfortunately, China’s return could see the crisis spread globally. That said, the spread may not trigger the further loss of global capacity. However, higher energy prices would also mean higher production costs. For energy-intensive metals like aluminum, this could set a new price floor.
Assessing the Realities Coming in 2023
While demand from China appears poised to rise, to what extent remains unknown. Indeed, a post-COVID China in 2023 will likely look considerably different than China in 2019. In addition to the costs of an economically restrictive approach to the virus, China remains plagued by high debt levels, its ongoing property crisis, and an aging population.
Considering this, China’s construction and property sectors have long been an engine of economic growth for the country. Construction spending also accounts for around 25% of global aluminum demand. Moreover, a contracting population will challenge the need for continued spending on future projects. While China has repeatedly intervened to support its beleaguered property sector, it will not be able to counteract a long-term slowdown in demand. Of course, both current and future price increases are purely speculative. This leaves markets at risk of over-correcting to the upside should China’s demand return prove lackluster.
Aluminum Prices: WTO Rules Against U.S. Tariffs
The WTO recently ruled against the U.S. in a trade dispute over its tariffs on imported steel and aluminum. The tariffs were imposed under the Trump administration in 2018 and included a 10% duty on aluminum imports. Subsequently, both the EU and UK negotiated tariff rate quotas (TRQs). These allowed limited volumes of aluminum imports into the U.S. free of duty beginning in 2022.
Meanwhile, China, Norway, Switzerland, and Turkey issued complaints to the WTO that the tariffs violated international trade rules. According to the reports, the WTO’s appointed panel found “the measures were not taken in time of war or other emergency in international relations.” Indeed, the U.S. initially imposed the tariffs on the grounds of national security.
Despite this, the WTO’s ruling appears unlikely to trigger any meaningful change. Adam Hodge, the spokesman for the Office of the U.S. Trade Representative, noted, “we do not intend to remove the Section 232 duties as a result of these disputes.” Due to the U.S.’s refusal to approve judges since 2019, the WTO’s Appellate Body is currently nonfunctional. The U.S. will likely file an appeal (as Indonesia recently did in its own WTO dispute). Such a move will effectively veto the WTO’s decision, as there is no way for them to hear the appeal.
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