LONDON: China imported an additional 158,000 tonnes of primary aluminum in June, bringing the half-yearly total to 744,000 tonnes.
When the world’s largest producer started tapping into the international market early last year, it seemed like a temporary hang-up caused by China’s rapid rebound from the lockdown.
A year later, however, and it is becoming clear that this is not a fleeting phenomenon like the one observed during the financial crisis ten years ago.
Growth in primary metal production in China has stalled as power-hungry smelters adjust to tightening energy efficiency targets. Producers cannot keep pace with demand, which means imports are needed to rebalance the domestic market.
This exerts a huge gravitational pull on aluminum inventories as the accessible metal migrates to Asian locations to capitalize on China’s new appetite for imports.
Everywhere else, buyers of aluminum, notably in the United States, are paying the price in the form of record physical premiums.
A STRUCTURAL CHANGE
China has sucked 1.8 million tonnes of primary aluminum since these accelerated imports began in the second quarter of 2020. (https://tmsnrt.rs/3lz2u9Z)
This exceeds the 1.5 million tonnes imported in 2009, the only historical precedent for such high volumes. However, at the time, the flare subsided after six months. The current wave of imports has lasted for over a year.
In addition, the simultaneous shift from a net exporter to a net importer of crude alloys is a new development which appears to be due to the partial relocation of the alloy scrap processing chain from China.
It should be noted that the relaxation of the import ban on scrap metal at the end of last year did not generate any increase in recyclable aluminum flows. Imports of scrap copper jumped 91% in the first six months of this year, but those of aluminum rose only 5% from low levels last year.
China’s proposed ban on scrap imports has shifted global flows towards Malaysia and India, which are now the two largest suppliers of alloys to the Chinese market.
While the shift is permanent, higher alloy imports are here to stay.
The big question is whether primary metal imports will also become the new normal.
The tension in the Chinese domestic market is currently being exacerbated by logistics – many foundries are in the northwest, far from the consumption hubs in the east – and the increase in demand for exports of products as the recovery s ‘installs in the rest of the world.
But the energy constraints facing an aluminum smelting sector still largely dependent on coal will not go away as energy efficiency targets tighten.
The market is betting that the country will continue to struggle to meet downstream demand from product manufacturers.
This is why the price of aluminum in Shanghai continues to approach the highs of the decade of May and the price of the London Metal Exchange (LME) is instead at $ 2,580 per tonne, just below the highest. last week’s three-year high of $ 2,642 per tonne.
STOCKS ON THE MOVE
The obvious stress in China’s supply chain isn’t just driving prices up.
It is also fueling the explosive rise in physical premiums everywhere else. US buyers are already paying over $ 3,000 per tonne for their metal, with the premium for delivery to the Midwest reaching an unprecedented $ 750 per tonne over the LME spot price.
A fierce rebound in demand for aluminum – up 18% in the first five months of this year, according to the Aluminum Association – has left the US market short of metal.
A dysfunctional freight industry doesn’t help, but the underlying problem facing US and European buyers is that most of the LME’s stock is in Asia.
The surplus metal from the financial crisis accumulated in Detroit and then in the Dutch port of Vlissingen.
This time around, the global COVID-19 surplus is in Asian locations within easy shipping distance of China, in particular Malaysia‘s Port Klang.
The port accounts for 61% of the LME’s total aluminum inventory and the Asian locations 90% in total. At the end of May, 85% of the 870,000 tonnes of metal stored outside the mandate were also in Asia.
Port Klang is now the largest hub for stock exchange-approved warehousing capacity, overtaking Rotterdam last year to reach 770,000 square meters at the end of June.
The storage capacity of the LME has declined over the past five years, but not in Asia and this is largely due to the redistribution of aluminum stocks, much more of which is stored in the exchange’s warehouse network than any other metal. (https://tmsnrt.rs/3jCEAIj)
LME stocks may not fully reflect the allocation of fully off-market stocks, but high physical premiums on both sides of the Atlantic suggest that there is little stock immediately available to fill gaps in the supply chain. ‘supply.
REBALANCING THE CHINESE MARKET
There is no shortage of drivers on the job in the high physical premiums, but competition for accessible inventory with China is obviously compounded by the fact that these inventory is kept away from buyers in the US Midwest.
The rest of the world is praying for an end to the disruptions that have disrupted global freight, but relief could still come from Chinese policymakers.
The sale of 140,000 tonnes of state aluminum in July appears to have had little impact on either price or supply. Shanghai Futures Exchange stocks are still down, last Friday’s count of 256,214 tonnes, the lowest since January.
However, Chinese policymakers have another powerful lever, already in use in the steel sector, where Beijing is also trying to juggle the need to cut production while meeting domestic demand.
Steel export tax breaks have been removed for a wide range of products in order to divert export flows to the domestic market.
Exports of aluminum products still benefit from a tax break, which is one of the reasons why so many semi-finished products leave the country – around 2.5 million tonnes in the first half of 2021.
Given the need to import increasing amounts of high priced primary metal to meet demand for products, discounts on exports of these products are starting to look increasingly abnormal.
There could be another twist in this new Chinese aluminum narrative and another shift in a rapidly changing global landscape – Reuters