Poor demand likely to keep aluminium prices on leash in near-term

Poor demand for aluminium has begun to overshadow concerns over its supplies, especially from Europe and China, and the metal —used in aircraft , automobiles, cans and kitchen—will likely rule lower this year. 

The latest concern over aluminium demand comes from developments in China, where the Xi Jinping administration has stopped operations of hydro-electric power plants and has begun rationing power supply in view of a heatwave sweeping the Communist nation. 

Smelters cut capacity

Aluminium smelters are big power consumers and are under pressure due to power shortages in Sichuan. Aluminium smelters in Sichuan have reduced their production in accordance with the local power rationing policy, and the production reduction has rapidly expanded to 3,95,000 million tonnes.

 “The potlines of some smelters are still closed or operating at low capacity,” said Shanghai Metal Market News (SMM).   

“After impressive rallies in the first quarter of 2022 following Russia’s invasion of Ukraine and investor concerns about supply disruptions, prices have collapsed back to pre-conflict levels as Chinese lockdowns and weakening demand worked to undo most gains,” said research agency Fitch Solutions Country Risk and Industry Research (FSCRIR).

Down 40% from peak

China’s zero-Covid strategy and resulting strict lockdowns are severely impacting aluminium supply chains, first causing uncertainty around supply from lockdowns in producing regions, and subsequently impacting demand from end-use sectors countrywide that are impacted by lockdowns, it said.

Aluminium had dropped nearly 1.5 per cent on the London Metal Exchange (LME) this week. It is currently quoting at $2,401 a tonne. This is $100 more than its one-year-low and down over 40 per cent from peak seen in March ($4,073) soon after the Ukraine war broke out. Prices are down 6 per cent year-on-year. 

Analysts point out at that fears over recession playing have also pulled down the metal that holds promise in the long-term.

Price outlook

“While supply risks continue to grow in the aluminium market (both in Europe and China), the market still seems more focused on the poor demand story,” said Warren Patterson, Head of Commodities Strategy with ING Think, an economic and financial arm of Dutch multinational financial services firm ING.

The recent developments have forced Fitch Solutions, a unit of Fitch, to lower the price outlook for the white metal to $2,850 a tonne from the previous $3,000 “in the light of weakening growth and demand led by the slowdown in Mainland China”. It has also lowered its 2023 price forecast to $,2700 from $2,800.

ING Think’s Patterson said the drop in aluminium price comes after Norsk Hydro announced that it would suspend primary aluminium production at the Slovalco smelter in Slovakia due to surging power prices. The smelter had already reduced output late last year and early this year, which left it operating at 60 per cent of its 1,75,000 tonner per annum capacity. 

Separately, Hydro has also said production will be affected at its Sunndal smelter in Norway due to a strike set to start on August 22. “The planned strike is estimated to idle around 20 per cent of primary production capacity for four weeks. Hydro Sunndal has a capacity of 4,50,000 tonnes per annum,” he said. 

Recovery unlikely

Fitch Solutions said China’s GDP will likely slow to 3.6 per cent with PMIs falling back into negative territory in July. “Lockdown risks remain despite the relaxation of zero-Covid measures and skyrocketing energy prices in Europe are raising the risk of recession, particularly in the Eurozone where the net current account deficit is worsening inflationary pressure from energy imports paid for in USD,” it said.

FSCRIR said it no longer expects demand in China to recover “significantly” in the second half as construction and consumer data look increasingly negative. High energy prices will force producers to continue to pass costs on to consumers or else throttle productive capacity as energy market measures are instituted. 

Pointing out that Chinese Sichuan province was cutting power supply to industries as an emergency measure from August 15 to ensure residential demand was met, Fitch Solutions said European smelters are struggling to respond to higher prices because relative energy costs have risen to a greater degree and supply shortfalls threaten continued output and bring more supply onto the market.

Downside risks dominate

SMM  said it was off-season for the domestic downstream aluminium consumption, but the offtake, led by real estate, was sluggish. Aluminium smelters in Sichuan mainly supply molten aluminium to downstream enterprises the local and surrounding regions. Thus, the output cuts by smelters in Sichuan has disrupted “short-term supply-demand balance” a little. 

Fitch Solutions said downside risks from lockdowns in China, rising interest rates, high energy prices, and high inflation are eroding consumer confidence and consumption has overtaken positive demand factors and supply constraints for aluminium. 

Despite high energy prices, historically low aluminium stocks, and lockdowns in Chinese aluminium-producing cities, prices remain under significant pressure from a strong US dollar, demand loss from Chinese end-use sectors, and poor investor sentiment towards the metals complex, it said.

Prices may not collapse to pre-Covid levels but they will be under pressure in the current scenario. SMM said it would take at least two months before the operating capacity is restored to June-end level. 

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