A Fragile Equilibrium
December 2018
In November, the aluminium price was relatively steady, finishing the month at US$1,947/t (US88.3¢/lb), up just US$4/t from the start of the month and remaining well below the price highs generated by major market disruptions earlier in the year. The continued subdued price performance is attributed to an apparent slowing of growth in China, and concern about its growing trade tensions with the US, which have seen traders approach the market with additional caution. November’s closing price was the lowest since August 2017.

Prices outside China averaged US$1,937/t (US87.9¢/lb) over November, down 4.6% month on month.

The relatively steady decline is underpinned by the ongoing trade tensions’ broader effect on commodity markets as prevailing issues from early in the year remained, but with little development. Alunorte remains curtailed and the US’s 25% import tariffs remain in place—in some spaces the tariffs are adversely affecting US consumers as opposed to suppliers. The compliance deadline for Rusal sanctions continues to be kicked down the road, suggesting ongoing progress by the company in meeting the US requirements. There is no strict timeline on the expected final lifting of sanctions. While many customers shifted early to other suppliers, some continued trading with sentiment inclined to resolution before full enforcement, reducing the impact on Rusal’s sales.

LME stocks were essentially unchanged by the end of November, finishing the month at ~1.05Mt. As such, visible stock cover of LME warehouses is 5.7 days. SHFE aluminium deliverable stocks declined for the fifth consecutive month, posting a ~70kt drawdown in November to close at 0.73Mt. Continued de-stocking in China is reflective of the supply addition discipline shown over most of the year. Unusually, prices have remained relatively low, at odds with the tightening of available metal supplies.

The Australia FOB alumina price averaged US$423/t over November, down 17.7% month on month. While remaining in tight supply, there was little in the way of developments relating to the 50% curtailment of Alunorte. A timeline for resolution of the issues and return to full production remains elusive. Winter curtailments in China, while expected to have a significantly smaller production than last year, is resulting in a relative softening of demand. Reduced price arbitrage has seen a fall in exports of alumina from China, which reached record levels in September and October.

While both aluminium and alumina prices continue easing, uncertainty in both markets is creating the potential for price volatility should tit-for-tat trade measures start being implemented. The alumina market will remain tight creating potential price upside should supply suddenly be further constrained. If the compliance deadline for Rusal is realised—now set for early January—it may prove difficult to compensate the supply deficit in the short term, creating aluminium metal price upside. However, as provincial plans for China’s winter curtailments start being released, it is becoming apparent that their production impact will be limited, which may help limit any price rise.