JOHANNESBURG (miningweekly.com) – Buoyed by events in China, the aluminium market is expected to see rapid growth in 2018, according to global energy, chemicals, renewables, metals and mining research and consulting group Wood Mackenzie (WoodMac).
In its latest aluminium report, the company highlighted that China supply reforms, the possible capping of future growth in Chinese smelting capacity additions, trade cases against Chinese exports of semi-finished products, and the direction of premia would be stand-out factors that would shape the trajectory of prices and the global aluminium market balance.
“Aluminium premia experienced a volatile 2017, led by large swings in US Midwest quotes. US tax cuts and the promise of a boost in infrastructure and defence spending kept premia at elevated levels. Moreover, a rising protectionist stance by the US Administration encouraged traders to build anticipatory inventories,” the report says.
WoodMac adds that rising freight rates in the aftermath of hurricane damage in the south-eastern US also added to premia strength.
“We expect US premia to remain at current levels and to move higher in the first half of the year, as antidumping investigations into Chinese imports semis into the US reach their conclusion and as post hurricane reconstruction work begins in earnest.”
While premia in Europe and Asia shadowed US quotes, there was not enough appetite from markets to return the parity between regions. As a result, strong arbitrage opportunities attracted record shipments of ingot into the US.
At the current level, US premia offer the most profitable netback globally.
The report further notes that the $63/t differential between Midwest and Rotterdam premia is more than enough to account for the difference in the cost of freight between the two regions. Imports from Europe and the Middle East will, therefore, continue to accelerate in 2018.
“We expect that up to 600 t/y could be displaced by the US ban on imports of foil and sheet from China. The resulting increase in primary demand in the US, but also in the rest of the world, would underpin US and European premia in 2018,” adds WoodMac.
The research and consulting firm further notes that the unpredictable nature of the London Metal Exchange (LME) spreads makes it difficult to form reliable expectations of their impact on aluminium premia. A high degree of volatility that has discouraged large-scale financing over the past two years will continue to marginalise carry trade activity.
Persistent declines in the LME inventory will lead to even more frequent pockets of tightness and volatility in LME spreads. While less demand for financial participation is normally a bearish sign, WoodMac expects stronger physical demand and a decline in off-LME stocks to offset a fall in financing demand.
“Overall, we project bullish trends in global aluminium premia to persist in 2018. US trade actions against China will be the key upside risk, not only to the US but also to European and Asian premia.”