From a technical perspective, global aluminum prices began to change their structure in short time frames, which could suggest further price drops. Currently, prices are beginning to approach previously-established lows. However, a bullish trend reversal can’t occur until aluminum establishes a clear price floor.
The Aluminum Monthly Metals Index (MMI) dropped by 8.84% month over month.
Global Aluminum Prices Mirror Copper, Fall Amid Lockdowns
As with copper prices, the impacts of China’s zero-COVID initiatives significantly dragged down aluminum prices. While each metal often moves on its own respective (and often idiosyncratic) fundamentals, the sheer weight of China’s economic issues is causing seismic shifts. As both the largest producer and consumer of commodities, China’s recent woes have had a strong impact across the sector.
For instance, LME aluminum and copper prices saw respective 13.69% and 4.96% month-over-month drops from March to April. This had a lot to do with the ongoing lockdowns in Shanghai, which caused manufacturing and consumer demand to contract significantly. According to the General Administration of Customs, aluminum imports into China saw a 4.6% year-over-year decline in March. All in all, it’s a trend many expect to continue as long as lockdowns and COVID-related restrictions persist.
EU Proposes Russian Oil Embargo
Meanwhile, the war in Ukraine ticked past its second month with countries around the world continuing to ramp up pressure on Russia. In fact, the European Commission recently proposed a sixth package of sanctions on Moscow. If implemented, they would stand as the toughest yet. As part of the package, Europe plans a full embargo on Russian oil by the end of 2022. Meanwhile, the US has had a ban on Russian oil, LNG, and coal imports since March.
Still, some member states of the EU remain divided about the severity and length of the sanctions. In many cases, this is due to their reliance on Russian energy supplies. After all, Russia is the world’s second-largest crude oil exporter (after Saudi Arabia), representing some 27% of all oil imports to the EU in 2021.
While negotiations remain ongoing, the European Commission appeared willing to adjust its proposal following pushback from certain member states. At present, the proposal would aid Hungary, Slovakia and Czech Republic with refinery upgrades. It would also allow a delayed embargo for those countries until 2024. A Russian oil transport ban for EU shipping services was also extended from one month to three.
Tight Energy Markets Could Raise Aluminum Prices
Aluminum prices are particularly sensitive to fluctuations in energy markets. In fact, on average, energy accounts for roughly one-third of input costs for the metal. This is why it is often referred to as “congealed electricity.” Therefore, aluminum price trends often mirror those of crude oil. Of course, both of these indices spiked dramatically following the Russian invasion of Ukraine in late February.
Prior to the war, Europe’s energy crisis had caused aluminum production across the continent to shutter. As such, the tightness left in the wake of Russian energy supplies will undoubtedly add upside pressure to aluminum prices. It’s also expected that this pressure will only worsen should the EU continue with its latest round of sanctions.
On the flip side, China’s lockdowns have temporarily muted the country’s demand for both oil and metals like aluminum. According to the General Administration of Customs, China’s crude oil imports fell 14% year over year in March. Of course, that relief is sure to end once the country recovers from the latest wave of COVID and restrictions lifted.
For both oil and aluminum, the return of Chinese demand combined with the absence of Russian energy supplies from markets like the EU could help aluminum prices bottom out. How quickly those factors will be priced into the market, however, remains to be seen.
By AG Metal Miner
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