Aluminium prices exceed expectations | OilPrice.com

Over Metal mining

Falling stock prices and rising LME inventories this year suggest that primary aluminum is currently in abundance. So far, aluminum prices have risen slightly since the beginning of the month as inventories have steadily declined. While the metal leaving the exchange comes from India, a good, deliverable brand, the metal coming out of Russia, which is facing sanctions in much of the West. Nevertheless, as my colleague Nichole Bastin reported just last weekRising Chinese production of primary aluminium – up 5% this year – and weak demand in Europe suggest that the primary market is not exactly tight.

So why do premiums for physical deliveries continue to rise?

Factors that influence the price of aluminium

The probable reasons for the rise in aluminium prices are twofold. Firstly, China's export tax is tying up primary aluminium domestically, making it uneconomical for the mills to export raw metal. The developments are reported weekly in MetalMiner NewsletterAs a result, much of China's high export volumes are made up of semi-finished products. The metal consumed in regions such as Europe and Japan – both of which have seen physical delivery premiums rise – comes partly from local, regional smelters and is imported from countries such as India, the Middle East and Australia.

Regional smelters in Europe continue to be severely constrained by high electricity costs, forcing many smelters to close temporarily (i.e. permanently). At the same time, importers continue to face high freight costs and the impact of port congestion as traffic problems in the Suez Canal continue to affect schedules and routes.

How global strikes and traffic jams could drive aluminum prices even higher

Container ships are still fully booked this month and space is tight for next month. Carriers are recommending that their customers book space a month or more in advance. In addition, strikes at some German ports are contributing to delays in Europe, and the threat of union action on the US East Coast is likely to exacerbate the problem during the rest of the year, even if the strikes only last a few weeks.

Spot freight rates have risen significantly since early May, and contract renewals have also led to price increases for volume carriers. Meanwhile, an agent reported that empty sailings will occur on the Asia-Europe route as capacity is insufficient due to the aforementioned congestion. This is despite the addition of 1.67 million TEU of newly built vessels this year. Notably, the Shanghai Container Freight Index (SCFI) remains high, supporting carriers' complaints about high rates.

While rising physical delivery surcharges often signal strong demand, the current market may just as much reflect suppliers' cost constraints. If logistics problems persist into the second half of the year, hopes of falling physical delivery surcharges may be premature.

By Stuart Burns

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