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China’s Low Aluminum Production Worsens Supply Chain Challenges

  • Aluminum prices saw an uptick in early January.
  • Production levels remain low in China, and inventory levels are historically low due to low smelter production and energy shortages. 
  • The aluminum market needs to see higher production levels to replenish inventory levels.
Aluminum

Via AG Metal Miner

 

As with many base metals, aluminum prices rose at the beginning of January. While it is true that China raising aluminum export taxes could have impacted aluminum prices, the market has witnessed somewhat volatile conditions since late September of 2022. And though prices are nowhere near their March 2022 historic rally levels, they still remain at historic highs.

Aluminum Prices: Trend Reversal, or No?

Considering the breakout of resistance in aluminum prices, action should continue to the upside for the time being. This could cause aluminum to seek even higher resistance levels, which would support a short-term uptrend.

(Click to see larger version)

Scrap Aluminum Supplies Low

Could the U.S. scrap aluminum supply face new challenges? According to a recent S&P Global article, the answer is yes. In fact, some U.S. aluminum sheet mills are currently looking to add scrap aluminum into their initiatives. However, due to ongoing aluminum can shortages in the US, mills continue to face problems finding UBCs (used beverage cans).

Between Q2 – Q3 of 2022, many businesses that rely on aluminum cans (like breweries and soda producers like Coca-Cola) faced massive problems with getting enough aluminum cans to meet demand. And now the issue has snowballed into businesses looking for UBCs. This could prove to be a significant challenge for aluminum scrap buyers.

Additionally, much of the world still sits waiting on China’s post-zero-COVID rebound. Unfortunately, production levels within China remain low, which isn’t helping aluminum prices. On top of that, inventory levels for aluminum also remain historically low.

When Will Aluminum Inventories Replenish?

One major factor continues to plague the aluminum market: low smelter production. While not the only issue impacting trade, smelters remaining shut down or at limited capacity remains a sizable problem. Even thought aluminum has a much lower melting point than other metals like nickel or copper, energy shortages will continue to plague the aluminum market due to smelters not having enough energy to operate. This same issue caused the industry to suffer significantly under the weight of Europe’s energy crisis 2022

In the end, aluminum prices are just a symptom of a greater problem. Even if buyers have the funds to restock their inventories, the supply just isn’t there. Therefore, production levels need to rise so that inventory levels can do the same. Of course, no one is 100% certain when that will happen. In the short term, the market could witness further volatility and – if inventory levels remain low – more supply chain bottlenecks.

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By Jennifer Kary

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