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Metal Miner

Metal Miner

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Aluminum Price Outlook Remains Bearish

  • According to a recent Reuters report, Glencore delivered a 40,000-ton shipment of Russian aluminum to LME-approved warehouses and more could follow.
  • Flows of Russian aluminum into the LME could weigh on prices.
  • The U.S. substantially narrowed its aluminum imports from Russia in the last few months, however, which could fuel upward price pressure in the markets.
Bearish

Via AG Metal Miner

Aluminum prices have stayed bearish in the short term. At the beginning of February, price action showed a short-term sideways trend, as no new lows or highs formed. This means prices need to break out of their current range to form a continuation trend or a downward reversal. Currently, however, future price direction remains unclear.

Altogether, the Aluminum Monthly Metals Index (MMI) rose 1.18% from January to February.

Russian Aluminum Heads to LME

Months ago, MetalMiner analyzed the potential ramifications of a proposed LME ban on Russian metal. Ultimately, the LME opted not to move forward with any restrictions. However, those calling for the ban continue to argue that high volumes of Russian material could distort LME prices. They cited self-sanctioning by companies as having the potential to cause a surplus of lower-priced material. Meanwhile, a large delivery of Russian aluminum from commodity trader Glencore into LME warehouses is sure to test this theory.

According to a recent Reuters report, Glencore delivered a 40,000-ton shipment of Russian aluminum to LME-approved warehouses in South Korea, and more could follow. Glencore made a previous shipment of Russian material in October, although the quantity remains undisclosed. Rusal, Russia’s largest producer, continues to deny sales of its metal on the LME. However, Glencore holds a long-term contract with Rusal, totaling 6.9 million tons. 1.6 of this initiated delivery in 2021 and should complete by 2024.

Flows of Russian material into LME warehouses would likely have a bearish impact. However, the extent of the effects remains unclear. In its decision, the LME acknowledged the possibility of “additional tonnages of Russian metal” but saw no threat of market disorder. For starters, inventories across base metals currently remain low. And though LME aluminum inventories appeared to bottom out in August, they remain nearly 125% below their historical average since 1979.

Clearly, an influx of Russian material would potentially boost those supplies. Still, inventories have a very weak inverse correlation with aluminum prices. And if companies refuse Russian-sourced metal, it could cause LME prices to slide. According to recent reports, interest in Russian material continues to grow amid compounding macroeconomic pressures. It is, therefore, possible that the price drop may not come to fruition.

Aluminum Prices Brace as U.S. Levies 200% Duty on Russian Supplies

The U.S. substantially narrowed its aluminum imports from Russia in the last few months. However, Bloomberg recently reported that the U.S. plans to add a 200% tariff on all Russian-made aluminum. Officials have considered the decision over the last few months amid concerns that dumping Russian material would harm domestic industries. 

Historically, Russia accounts for around 10% of total U.S. aluminum imports. That figure has dropped to around 3% more recently and could decline further once the U.S. enacts such a substantial duty. Meanwhile, increased domestic supply tightness could see Midwest Aluminum premiums, which corrected to the downside toward the end of January, rise once again. Thus far, the EU has made no indication it will follow the U.S.’s lead. 

CME Aluminum Futures Builds Liquidity

A buildup of Russian metal could challenge the LME as the global benchmark for aluminum prices. However, should that fail, competition from other exchanges may succeed. The CME Group’s Aluminum futures contract continues to build liquidity. 2022 saw average daily volume (ADV) hit a new record of 1.6K contracts per day, while market participation climbed 158% from the previous year. This momentum continued into January. By the end of the month, ADV and open interest (OI) rose to 3.2K and 1,968 contracts, respectively. 

While the CME has a long way to go to compete with the LME, its aluminum futures contract is now more liquid than the Midwest premium contract.  If momentum continues to build, the contract could become viable as a price discovery mechanism. The March nickel squeeze caused the LME to lose liquidity across contracts, although nickel incurred the most substantial loss. More than that, the LME’s reputation appears irreparably damaged. Of course, concern over the influx of Russian material into LME warehouses could exacerbate this trend. In time, the CME could meaningfully challenge the LME’s dominance.

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By Nichole Bastin

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