After seeing a short-term bullish rebound in July, aluminum prices began to decline again in early August modestly. All in all, the rebound was insufficient to suggest a bullish reversal. As such, global aluminum prices remain within a macro downtrend despite recent directional uncertainty.
Aluminum Prices Move Sideways as Energy Costs Make Production Unprofitable
Before Russian energy giant Gazprom decided to cut Nord Stream 1 gas flows to 20%, Europe had already shuttered roughly half of its aluminum smelting capacity. According to Alcoa CEO Roy Harvey, high energy prices mixed with low aluminum spot prices in June made between 10% and 20% of global aluminum smelting operations unprofitable. In China alone, smelter unprofitability extended to around 50% that month. Meanwhile, Norsk Hydro ASA CFO Kildemo estimated that more than one-third of global smelters had operated at a loss. Now that European countries face energy rationing as energy prices continue upward, aluminum production, especially in Europe, remains pressured. According to a survey conducted by the German Aluminum Association, 9 out of 10 companies would be unable to switch energy sources should gas become unavailable. Indeed, energy shortages could cause the roughly 900,000 tons of production cutbacks we’ve witnessed this year to double moving into 2023.
Europe’s energy crisis was enough to pause the 4-month downtrend in aluminum prices, if only temporarily. Since mid-July, prices appeared to hit a bottom, reaching their lowest point since April of 2021. Soon after reaching this grim milestone, they began to move sideways. It’s true that the crisis may not be enough to reverse the price trend, especially amid a worsening global demand outlook. Still, for now, it’s enough to add some visible friction to the downward momentum.
China is Filling Supply Gaps on Both Sides of the Sanctions
So far this year, Chinese products have increasingly filled the gaps left in the wake of the war in Ukraine. And while Western sanctions have avoided targeting Russian aluminum specifically, the downstream effects of Australia’s export bans on bauxite ore and alumina have disrupted Russian production nonetheless.
That said, China’s increased alumina production and its willingness to ship to Russia limits the effects of these shortages. These shipments have also helped turn China into a net exporter of alumina, a rank it achieved back in April. In Russian LNG exports once destined for Europe have now pivoted toward China.
In addition to alumina, China boosted both its primary aluminum production and exports. Specifically, primary unwrought aluminum exports rose by nearly 364% in the first half of the year over 2021, with a large portion of that material going to Europe.
Aluminum Ingots Hit Hardest, But Semis Also Impacted
While ingot production will suffer the brunt of Europe’s energy crisis, semis will also see an undeniable impact. For one, any reduction of primary metal and increase in physical delivery costs will support conversion premiums, especially if high prices are to blame. Secondly, European semis mills continue to face competition from Chinese imports.
It’s true that some Chinese-sourced products have quota restrictions and/or anti-dumping duties, but many do not. Beyond that, those duties become more easily surmountable as the cost of European-produced semi-manufactured products increases.
The return of European anti-dumping duties following a temporary suspension should stem at least some of the flow from China. Nonetheless, semis exports from the country continue to increase. Following an 18% year-over-year rise in 2021, semis exports have seen a 28% increase since the start of 2022.
By AG Metal Miner
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