Aluminium price rise though surprising has little long-term significance

The London Metal Exchange (LME) aluminium price has risen from the low $1,400s per metric ton in October to the mid $1,550s last week.

At the same time, the Japanese have started settling first quarter 2016 physical delivery premiums at $110 per mt, 22% higher than the previous quarter, the first time they have risen in a year.

Meanwhile, probably not unconnected, Japanese port stocks have fallen at the country’s three major ports. Stockpiles fell in November by 7.5% to 401,000 mt according to Reuters. Over the in US, the Midwest transaction price, which includes the LME price and premium that buyers pay to take delivery of the metal, has risen steadily this month to $1,736 per metric ton by December 24, up from $1,599/mt on 28 October, which was its lowest point since May 2009.

Perhaps emboldened by the rise in delivered prices — and certainly supported by financial support from the state of New York in the case of Alcoa and better power prices in Kentucky in the case of Century — some planned plant closures have been reversed keeping 86,000 mt of annual capacity operating.

Over in China, source of much of the world’s overproduction, some 4 million mt of plant closures are said to have been implemented in 2015 and the State Reserves Bureau (SRB), at the direction of the National Development and Reform Commission, is looking at buying at least 1 million tons, but possibly twice as much, to aid smelters awash with metal.

So, by all accounts the market is turning a corner, or so what one could infer from what it seemed to be like a knee-jerk reaction soon after the price curve took an upward turn. However, to say the market has turned, is far too early to call.

Supply is more balanced in the west as evidenced by the slight rise in physical delivery premiums in the US and Europe but Alcoa and Century’s postponement of smelter closures is more a response to cost reductions they have squeezed out of the local and state utilities than it is a belief the market has turned.

In China, capacity closures are as often announcements of closures to come as they are actual capacity shutdowns today. Some may not materialize even. Further, those closures are trumpeted much more loudly than news of new capacity that is continuing to come onstream.

As per recent data, LME aluminium is expected to retest a support level at $1,420 per metric over the next three months, a break below which could cause a loss to the next support at $1,255 per mt.

There is no shortage of metal around and “product” continues to flood out of China displacing sales that would otherwise be met by global suppliers and generate demand for primary metal. Last but not least, there is some 15 million mt of metal sitting in long-term finance deals that, sooner or later, will come back onto the market.

So, it was a mere jump from a lull in the market. To see what exactly happens to the aluminium price curve, one has to wait and watch till mid-week of January.

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