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Metal Miner

Metal Miner

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Aluminum Prices Flatline As LME Grapples With Russian Inventory

  • The Aluminum Monthly Metals Index (MMI) dropped 3.19% from May to June as the share of Russian aluminum in LME warehouses surged to 68% in May.
  • The correlation between LME and CME aluminum prices is eroding modestly, indicating a possible regionalization of the aluminum market and increasing irrelevance of LME prices to Western buyers.
  • India has requested tariff exemptions for aluminum and steel products offering to remove tariffs on certain U.S. agricultural goods in response to the Trump administration’s 2018 tariffs.

Via AG Metal Miner

Aluminum prices continue to lack enough strength to form either bearish or bullish trends. Since aluminum prices have yet to break out of range meaningfully and there is no established uptrend or downtrend, the market remains highly risky. Altogether, the Aluminum Monthly Metals Index (MMI) dropped 3.19% from May to June.

Russian Aluminum in LME Warehouses Up to 68%

The LME continues to have a Russian problem. Following a slight dip in April, the share of Russian aluminum in LME warehouses jumped to 68% in May. The problem originated last fall when the exchange chose not to restrict or ban Russian material from its warehouses. The move came despite a growing amount of governments and companies opting to sanction it.

The LME ultimately dismissed the risk of such a build-up. At the time, it argued that a slowdown in the West and the number of countries still willing to purchase Russian aluminum would ultimately help inventories regulate themselves. However, this has not happened. Instead, the LME’s use as a global benchmark appears increasingly at risk.

The LME seems to recognize growing market concern over the disproportionate presence of Russian-origin primary aluminum, as the most recent monthly country of origin (COO) data came alongside a formal update. The exchange began adding COO data to its inventory stocks at the start of the year to improve transparency and ostensibly alleviate market concern. In this case, the additional information “the LME considers helpful to provide” included warrant and inventory outflow data that, at least in the view of the LME, means “a meaningful set of global consumers continue to accept Russian metal.”

Related: Mexican State Firm Was The Top Net Buyer Of U.S. Natural Gas In 2022

The scandal-ridden exchange noted it would continue to monitor inventory data. However, it once again chose to take no further steps to regulate inflows of Russian material. In the absence of any moves by the LME, supply from India will play an important role as a counterweight to Russia, as it has throughout the year.

LME, CME Correlation Strong But Declining

Source: Insights, Chart & Correlation Analysis Tool

Aluminum is certainly not the only contract at risk for the LME. According to a recent Bloomberg article, the LME lost benchmark status for part of the nickel market. As Christel Bories, CEO of ferronickel producer Eramet SA, stated, an index from Shanghai Metals Market “has become the benchmark” for ferronickel pricing.

While the CME opted not to create a nickel contract in the wake of the LME’s nickel squeeze, it does have an aluminum contract with enough liquidity to make it viable for use as a contracting mechanism.

Currently, LME and CME aluminum prices continue to move largely in tandem, although the two are not the same. (MetalMiner publishes both within Insights). Since 2022, CME prices carried an average premium of $8/mt over LME prices. That delta currently sits at almost $23/st as the rising presence of discounted Russian material weighs on LME prices.

While it remains strong, the correlation between the two prices is now eroding, albeit modestly. LME and CME aluminum prices boast a 99.56% correlation that began in early 2022. However, when considering only the first 5.5 months of 2023, that correlation slides to 97.74%. The correlation between the two prices may continue to erode as the aluminum market appears increasingly regionalized, and as a result, we could see LME prices become increasingly less relevant to Western buyers.

Source: Insights, Chart & Correlation Analysis Tool


India Requests Tariff Exemptions for Aluminum, Steel

Meanwhile, India recently became the latest country to request tariff exemptions for aluminum and steel products. India’s move comes a year after the EU and UK successfully negotiated tariff rate quotas (TRQs). In its recent request, India offered to remove tariffs on certain U.S. agricultural goods. The country took these measures in response to the Trump administration’s 2018 tariffs. The tariff marked a 25% duty on steel imports and a 10% duty on aluminum imports.

A source from the Indian government hinted at flexibility should the U.S. wish to address other trade measures. However, according to Reuters, the chance of approval for India’s request appears unlikely, which will mean no market impact. 

Instead, the U.S. will likely remain protective of its domestic producers ahead of several new mills coming online. The completion of construction on Novelis’ Alabama mill and Steel Dynamics’ Mississippi mill will add an expected 850,000 tons of new U.S. capacity. While both are not due to start producing until 2025, rising capacity in the U.S. could become an additional challenge for the LME. As the market becomes increasingly deglobalized, this could pave the way for the increased use of CME prices for contracts.

By Nichole Bastin

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