Price movement recap
Prices on LME are still above what they were before the COVID-19 lockdown in March 2020 but remain lower than on SHFE. China’s demand is very strong and has consequently seen domestic prices increase. Not forgetting the government injecting money to re-boost the economy, especially in the infrastructure sector.
This price increase has led to a boost in output, which was 3.18 million tonnes in November, an increase of almost 9% compared to November 2019. The current price is encouraging smelters in China.
In addition, there is a Chinese need for automobile production which has also led to an increase in aluminium price.
Forward curve
The price has increased compared to the previous month for the same delivery period.
For the following year, the curve is almost flat in a small contango, demonstrating an uncertainty that the curve can shift at any time. As it does not increase substantially we could argue that it may not cover the costs of financing and storage for delivery in the upcoming months.
Supply and demand dynamic
From the supply side, an increased focus is given to the can’s recycling sector meaning secondary aluminium is expected to take more and more space in supply. Robert Budway, president of Can Manufacturers Institute said that: “More than 90 percent of these recycled cans get turned into aluminium sheets used to make new beverage cans. These used cans plus other scrap metal create an average recycled content rate of 73 percent, which is exponentially higher than any competing substrate.” In parallel, more and more companies such as UC Rusal, Russian Federation major aluminium company, are focusing on making their smelter more sustainable by obtaining certifications by the Aluminium Stewardship Initiative.
Inventory levels
The stock level of LME is still decreasing. China representing 55% of the global output has seen its production increase since April 2020 as its economy returns to normality after the COVID-19. Besides, China which was a net exporter is now a net importer of primary aluminium due to the increase of its own demand and a decrease of exports as the rest of the world struggles to recover from the global pandemic. The inventory on the Shanghai Metal Exchange keeps decreasing showing how tight the China aluminium market is and impacting directly the London Metal Exchange. Moreover, importation of aluminium became much more profitable in China, and as the demand in the country is high, companies tend to import more.
For a country producing a majority of the world’s supply, we would not expect them to become a net importer. One reason is a fluctuation for the US dollar, as the Chinese yuan became stronger against the dollar as well as the tight Chinese inventory.
Recommendations
As the contango is relatively flat, we cannot guarantee that storing and financing costs will be covered. Trading behaviour will be influenced by the forward curve, here the contango does not have an important slope, so it may not be worth it to store the goods.
Beatriz Ferreira Caetano, Virginie Gruaz and Mingxin Ma
References
Aluminum Futures Quotes – CME Group, [no date]. [online]. [Viewed 17 December 2020]. Available from: https://www.cmegroup.com/trading/metals/base/aluminum_quotes_globex.html
CHINA AUTO: Vehicle output growth bolsters raw material prices in November | Metal Bulletin.com, [no date]. [online]. [Viewed 17 December 2020]. Available from: https://www.metalbulletin.com/Article/3966588/Aluminium/CHINA-AUTO-Vehicle-output-growth-bolsters-raw-material-prices-in-November.html
Five More Rusal Facilities Certified By Aluminium Stewardship Initiative, 2020. Aluminium Insider[online]. [Viewed 17 December 2020]. Available from: https://aluminiuminsider.com/five-more-rusal-facilities-certified-by-aluminium-stewardship-initiative/
HORNER, Will, 2020. Aluminum Prices Surge as Chinese Demand Accelerates. Wall Street Journal[online]. 20 October 2020. [Viewed 17 December 2020]. Available from: https://www.wsj.com/articles/aluminum-prices-surge-as-chinese-demand-accelerates-11603200739
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Metal stocks to gain from China’s rising demand, 2020. The Malaysian Reserve [online]. [Viewed 17 December 2020]. Available from: https://themalaysianreserve.com/2020/12/14/metal-stocks-to-gain-from-chinas-rising-demand/
Shanghai-bonded aluminium stocks plunge in Nov on open arb; zinc shows biggest increase | Metal Bulletin.com, [no date]. [online]. [Viewed 17 December 2020]. Available from: https://www.metalbulletin.com/Article/3964495/Aluminium/Shanghai-bonded-aluminium-stocks-plunge-in-Nov-on-open-arb-zinc-shows-biggest-increase.html
STAFF, 2020. Aluminum Association Report Emphasizes Aluminium Beverage Can’s Importance To Sustainability. Aluminium Insider [online]. 6 December 2020. [Viewed 17 December 2020]. Available from: https://aluminiuminsider.com/aluminum-association-report-emphasizes-aluminium-beverage-cans-importance-to-sustainability/