2022 is a period of volatility
Aluminum prices have seen significant volatility in 2022 due to the Russia-Ukraine conflict, logistics issues, growing recession fears and the 2019 Neocoronavirus pandemic.
Aluminum prices on the London Metal Exchange peaked at $3,849 per tonne in March this year, but have now fallen more than 40% from their post-Russia-Ukraine conflict peak.
Energy costs have soared in the wake of the Russia-Ukraine conflict, squeezing producers’ margins, with energy-intensive metals being particularly hard hit. Aluminum is the most energy-intensive light metal, requiring about 40 times more energy to produce than copper.
Major European smelters, including Alcoa’s St. Chiprion aluminum smelter and Hydro’s aluminum smelter in Slovakia, have implemented several production cuts since December 2021.
As of mid-October, Europe and the U.S. have combined to cut about 1.7 million tons of capacity from the second half of 2021, accounting for 25% of European production and 2.1% of total global production.
The production cuts in Europe account for about 1.4 million tons of capacity. In the U.S., more than 300,000 tons of capacity has been cut, including Alcoa’s Warrick aluminum smelter and Century Aluminum’s Hawesville aluminum smelter.
Despite the recent weakness in energy prices, we do not expect capacity to recover in the near term as Europe heads into winter and the Russian-Ukrainian conflict continues. Given the uncertainty of energy prices through next year, the potential for more aluminum smelter closures and production reductions is high. Any announcement of further aluminum plant closures could lead to a spike in aluminum prices, but any potential rally is likely to be unsustainable. We do not expect European aluminum smelters to restart until 2024.
Global primary aluminum production rose 3.1% year-over-year to 5.85 million tons in October, despite continued production cuts in Europe and the U.S., according to the International Aluminium Association. China’s production was estimated at 3.475 million tons, according to the International Aluminium Association.
Total global production on an annualized basis was 68.9 million tons, according to the ICA. As for China’s production, ICA estimates that the equivalent adult rate for October was 4.09 million tons.
Aluminum smelters in China are also facing constraints. In Yunnan, which is affected by drought and produces 11% of China’s aluminum output, the government has asked aluminum smelters to reduce their start-up rates from mid-September. Aluminum smelters in Yunnan have already cut about 20 percent of their operating capacity, or about 1.1 million tons per year. Idle capacity is unlikely to resume before the end of this year due to current energy issues and is expected to restart in the second quarter of 2023 once reservoir levels stabilize.
This is the second consecutive year of primary aluminum production cuts in Yunnan. 2021, Yunnan’s aluminum smelters experienced three rounds of massive production cuts amid power supply shortages, reducing aluminum smelting capacity by 1.74 million tons/year on an annualized basis.
Prior to Yunnan’s production cuts, Sichuan’s aluminum smelters cut 920,000 tons of capacity in August, accounting for 2% of China’s total production. Most of Sichuan’s smelters have now restarted idle capacity.
More recently, some aluminum smelters in Henan province plan to cut about 10% of capacity due to winter-related cutbacks and operating losses, which could close 50-100,000 tons/year of capacity.
Nevertheless, despite the energy crisis, China’s aluminum production has remained stable. Data from China’s National Bureau of Statistics show that China produced 33.33 million tons of aluminum in the first 10 months of the year, up 3.3% from the same period in 2021.
In the longer term, the sector is vulnerable to further disruptions as China continues to promote decarbonization of the aluminum sector, increasing the share of green energy generation and shifting capacity from coal-based Shandong Province to hydropower-based Yunnan Province, where green energy is heavily dependent on seasonality and general weather conditions.
The rise in global aluminum production comes at a time when demand is weak due to the global economic downturn.
The focus in the aluminum market has shifted to demand issues due to concerns about a recession in Europe amid high electricity prices, tighter monetary policy by central banks and continued implementation of new coronary pneumonia restrictions in China.
Industrial metal prices were hit by weaker global demand and concerns about a stronger U.S. dollar. The growing risk of recession in the U.S. and Europe, as well as uncertainty about China’s recovery, may continue to pose downside risks to the demand outlook.
In its latest World Economic Outlook, the International Monetary Fund lowered its global growth forecast for next year to 2.7% from 2.9% in July and 3.8% in January, adding that there is a 25% chance that global growth is expected to slow to below 2% next year.
About one-third of the global economy is likely to contract next year, with the U.S., EU and China all set to remain stagnant. Excluding an unprecedented slowdown in 2020 due to a coronavirus pandemic, next year’s performance will be the weakest since the global financial crisis in 2009.
Aluminum consumption has been hit by a gloomy global growth outlook, with world primary aluminum demand excluding China expected to grow 0.4 percent year-over-year in 2022, according to CRU. According to CRU, no significant recovery is expected in 2023, as many economies will struggle with recession, and demand is expected to grow only 1.8 percent year-on-year in 2023. European demand will take the biggest hit in 2022 and is expected to be the main reason for weak growth in 2023.
In China, demand stalls in 2022 due to a zero-covid policy and embargo, and CRU expects demand to grow by only 0.1% y/y by about 4,000 tons in 2022, while recovery is expected to be slow in 2023 due to a slowdown in the construction sector.
Russian metals remain the biggest uncertainty
One potential source of price volatility is U.S. or EU sanctions on Russian raw materials. Aluminum has been largely left out of the rounds of sanctions imposed on Russia and Ukraine in the wake of their conflict, but the U.S. is reportedly considering imposing an effective ban on Russian imports of the metal. The Biden administration is reportedly considering three potential measures, a total ban on imports of Russian aluminum, raising tariffs to levels equivalent to the ban, and sanctions against Russian aluminum companies that produce Russian aluminum.
To date, the only country that has taken direct action against the Russian aluminum industry is the Australian government. In March, the Australian government banned exports of bauxite and alumina to Russia, effectively freezing Rusal’s offtake from its joint venture, Queensland Alumina. In Ukraine, Russia’s other major raw material supplier, the conflict has shut down Rusal’s Nikolaev alumina plant. Chinese producers have filled the alumina gap and they have been increasing their exports to Russia.
However, if the U.S. decides to sanction Rusal, the impact could be severe, keeping in mind the market’s reaction to sanctions in 2018, when LME aluminum prices soared to $2,718 per tonne, the highest level since 2011, followed by a gradual decline over the weeks and months. The sanctions were then lifted in January 2019.
If the U.S. decides to move forward, a move that could drive the Russian producer out of Western markets, depending on the severity of the sanctions, it would push up global aluminum prices and distort global aluminum trade flows.
Meanwhile, at least for now, transparency in the aluminum market has improved following the LME’s decision not to act on Russian metal entering LME warehouses, as a large portion of the market is still planning to buy Russian metal next year.
The LME is considering the possibility of banning Russian metal from its warehouses, restricting the inflow of Russian metal or taking no action at all.
Instead, the exchange has said it will issue regular reports from January 2023 detailing the percentage of Russian metal stored in LME warehouses under warrants to provide more transparency. In response to the LME’s proposal, Rusal has called on the LME to begin disclosing the source of all warranted metal inventories, rather than disclosing Russia separately as proposed. Alcoa also supports the idea of providing more details on the source of raw materials from LME warehouses.
If we continue to see more and more self-sanctioned Russian metal, the risk is that we will see more Russian metal being delivered to LME warehouses, which could mean that the LME trades at a lower price than it actually does. However, the LME believes that given the low global outlook, we will see more metal flowing into warehouses anyway.
The LME’s decision to continue to allow Russian metal into its warehouses has put some downward pressure on aluminum prices, easing fears of a supply shortage. How much further pressure aluminum prices will face going forward will depend on whether we see a significant flow of Russian metal into LME warehouses in the coming weeks or months.
While the LME acknowledges that LME prices may start to increasingly reflect the price of Russian metal if significant flows into LME warehouses, they believe that premiums will play an important role, which may reflect a greater proportion of the full cost, thus allowing non-Russian metal producers to continue to receive fair value for their metal.
Russia accounts for 6% of the approximately 70 million tons of global aluminum production this year, and Russian aluminum has accounted for three-quarters of LME inventories over the past 10 years, according to the LME.
The LME reported that the proportion of Russian metal in LME warehouses did not change significantly during the discussion paper, with the proportion of live tonnage of Russian aluminum on warrants at 17.7 percent as of Oct. 28, compared with 17 percent on Oct. 6 when the LME released the discussion paper.
Meanwhile, Russian metal flowed heavily into Western markets in the first half of the year. From March to June, European imports grew by an average of 13% per month year-on-year, while U.S. imports from Russia grew by 21% over the same period.
Most of Russia’s aluminum customers have been accepting deliveries under existing contracts, but that could change next year. Self-sanctions are likely to disrupt trade flows, as Russian metal is likely to flow to the London Metal Exchange (LME), a last resort. Aluminium India’s subsidiary Nobelis and Norsk Hydro’s extrusion unit have said they will not sign new Russian procurement contracts in 2023.
Rusal recently said its sales picked up after the LME’s decision, with more than 76% of its primary and value-added aluminum production in 2023.
Prices to decline in early 2023 due to poor near-term economic outlook
Looking ahead to the first quarter of 2023, the risks to aluminum prices will be primarily to the downside, with the ongoing Russia-Ukraine conflict, rising energy prices, lack of natural gas supplies, high inflation and weak downstream demand all adding to the pessimistic outlook for the lightweight metal.
According to CRU, the aluminum market will significantly reduce the global deficit in 2022 and turn into a surplus in 2023, with a projected market deficit of 300,000 tons in 2022, down from 1.6 million tons in 2021. Taking into account production cuts, CRU expects only a modest surplus of 30,000 tons next year. This is driven by demand destruction in 2022 and 2023 from the world excluding China and higher domestic production in China than in 2021.
Excluding China, the projected global surplus is only 71,000 tonnes. The reduction in demand will offset the impact of aluminum smelter closures in recent months.
In the short term, the market will remain focused on the larger macroeconomic and demand side of the equation, with prices expected to fall further to $2,150 per tonne in the first quarter of 2023.
We believe that aluminum prices should begin to recover in the second quarter of 2023, although any recovery is likely to be slow.
Post time: Dec-02-2022