Aluminum cheaper due to quarantines and construction problems in China

World aluminum prices fell below $2,300 per ton for the first time since April 2021, according to the London Metal Exchange (LME). According to the trading floor, during the trading process the prices fell to $2298/t, at 15.00 Moscow time the quotes were in the region of $2305/t.

As Vedomosti wrote, in March of this year, world prices for non-ferrous metals reacted with rapid growth to the start of a special military operation (SVO) of Russia in Ukraine. In particular, the cost of aluminum on the LME hit a new all-time high, reaching $3,984/t (+20% versus February 23).

Then, against the backdrop of deteriorating demand prospects due to the coronavirus outbreak in China and fears of a recession amid rising global inflation and tightening of the monetary policy of the US Federal Reserve, base metal prices began to decline. In the second quarter of 2022, they fell by 24% and reached the level of March 2021. This was the first quarterly decline since the start of the coronavirus pandemic and the strongest since 2008 (Vedomosti reported this on August 9). By early July, LME aluminum prices had fallen 42% from their March peak to $2,319/t.

The Russian non-ferrous metallurgy sector, along with the macroeconomic situation in the first half of 2022, was also affected by sanctions restrictions in response to the SVO in Ukraine. And although they practically did not affect non-ferrous metal enterprises (unlike the ferrous metallurgy sector, which actually lost its premium European market), many companies encountered difficulties in terms of supplying raw materials and logistics of finished products.

In particular, the largest Russian aluminum producer UC Rusal noted that the Australian government’s ban on alumina exports to Russia and the suspension of production at an alumina refinery in Ukraine had a negative impact on the availability of raw materials for aluminum production and led to an increase in costs.

“The cost of aluminum production in the first half of 2022 increased by 33.2% to $2028/t compared to $1523/t by 2021 due to higher costs for alumina, other raw materials and materials, as well as logistics,” it says in an aluminum company report.

UC Rusal did not respond to clarifying questions from Vedomosti.

The main reason for the decline in world prices for aluminum is the general slowdown in the global economy and the decline in the construction sector in China, according to an expert on the stock market “BCS The world of investments” Dmitry Puchkarev. He admits that prices may drop below $2,000/t in the future, but “not for long.” Such a price level is unprofitable for most producers, Puchkarev explained.

Commodity market analystOpening investment” Oksana Lukicheva attributes the decline in aluminum prices primarily to the difficult situation in China, which constantly closes large cities for quarantine due to outbreaks of coronavirus infection. She recalls that the last significant drop below $2,300/t happened against the backdrop of news about the quarantine of the city of Chengdu (the fifth largest city in China with a population of about 15 million people. – Vedomosti). “This could have a negative impact on aluminum consumption in the country,” she adds.

Lukicheva draws attention to the fact that aluminum production in China is growing, and its consumption is suffering from quarantines, which increases exports. “The data of the General Administration of Customs of China show that the export of aluminum and semi-finished products in July 2022 amounted to 652,000 tons, and in the seven months of 2022 – 16.9 million tons, an increase of 39% by 2021. That is, there is an increase in volumes export deliveries, primarily to the scarce European market,” the analyst notes.

Puchkarev adds that this year a particularly important factor provoking a rise in the price of aluminum has been the rise in energy costs. “Due to high gas prices in Europe, producers are forced to reduce capacity utilization, as production becomes unprofitable,” he clarifies.

In mid-August, Slovalco, the largest aluminum smelter in Slovakia, announced a halt in production due to a sharp increase in the cost of electricity. Since the beginning of 2022, the enterprise has been using 60% of its primary aluminum production capacity, which is planned to be mothballed by the end of September. At the same time, Slovalco intends to continue to produce about 75,000 tons of secondary aluminum per year (Vedomosti wrote about this on August 17).

According to Lukicheva, aluminum prices may remain in the range of $2,200-2,500/t until the end of 2022. “In the IV quarter, there may be some recovery in prices. The aluminum market may be supported by an improvement in the economic situation in the world and in China, but so far there are no prerequisites for this,” she says. Puchkarev gives similar estimates, citing a range of $2000-2500/t.