Aluminum prices defy expectations | OilPrice.com

By Metal miner

The drop in exchange prices and the rise in LME stocks this year indicate that the mayor aluminum is currently in sufficient supply. So far, aluminum prices have risen slightly since the start of the month as inventory levels have steadily declined. However, while the metal that left the exchange was Indian, a good, deliverable brand, the metal that arrived was Russian, which faces sanctions in much of the West. However, like my colleague Nichole Bastin reported just last weekrising Chinese primary aluminum output — up 5% this year — and weak demand in Europe suggest the primary market isn’t exactly tight.

So why do physical delivery premiums keep rising?

Factors Affecting Aluminum Prices

The probable causes behind the rise in aluminum prices are twofold. The first is that China’s export tax traps its primary aluminum domestically, making it uneconomic for mills to export the crude metal, whose developments are covered weekly in MetalMiner’s newsletter. As a result, much of China’s large export volumes consist of downstream semi-manufactured products. Metal consumed in regions such as Europe and Japan – both of which saw firm physical delivery premiums – comes partly from local, regional smelters and imports from sources such as India, the Middle East and Australia.

Europe’s regional smelters remain severely constrained by high energy costs, which has caused many plants to close temporarily (read permanently). Meanwhile, importers continue to face high shipping costs and the impact of port congestion due to continued disruptions to shipping schedules and routes caused by Suez Canal traffic issues.

How strikes and global congestion could drive aluminum prices higher

Container ships remain fully booked through this month and space is tight for next month, with shippers recommending customers book space a month or more in advance. Moreover, strikes at some German ports are adding to delays in Europe, and the threat of union action on the US East Coast is likely to compound the problem for the rest of the year, even if the strikes last only a few weeks.

Spot freight rates have increased significantly since early May, and contract renewals have also increased rates for volume shippers. Meanwhile, an agent reported that the Asia-Europe route is experiencing empty sailings due to insufficient capacity caused by the aforementioned congestion. This is despite the addition of 1.67 million TEU of new-build vessels this year. It is worth noting that the Shanghai Container Freight Index (SCFI) remains elevated, supporting shippers’ complaints about high rates.

So while rising physical delivery premiums often signal strong demand, the current market could just as much reflect supplier cost constraints. If logistics problems persist into the latter part of the year, hopes for a reduction in physical delivery premiums may be premature.

By Stuart Burns

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