CRU: Aluminum Vocabulary Expands—Scarcity and Real Price Inflation

Inventories are Depleting and What Remains is in Strong Hands

Global inventories expressed in days of global consumption stood at 78 days ending 2020. This compares to 114 days at the end of 2009. The World ex-China ratio is more dramatic. Reported inventories stand at 45 days versus 108 days ending 2009.

Buyers have long taken comfort in the amount of unreported stocks. These are stocks held by financial intermediaries in so-called “cash and carry” trade. This entails buying spot physical aluminum and hedging it forward in the London Metal Exchange (LME), locking in an attractive positive yield. The financial players thus have created an arbitrage between the LME and the localized physical market, the so-called physical premium.

Unreported stocks in 2009 were 2.3 million tons outside China. Today, they are 6.6 million tons. That means the financial community has nearly tripled its bet on the arbitrage. That bet is paying off handsomely now. Buyers are finding spot metal to be hard to pry out of the hands of the trade short of paying much higher premiums.

U.S. Midwest Aluminum Premiums Approach Record Highs

Published premiums as reported by the media would suggest that the Midwest is 17.50 cents/lb over LME. Don’t believe it. The conundrum for the  media is that in tight, illiquid markets they struggle to validate real tradable premiums. Thus, the markets are prone to “gapping up” on light volume. Such is the case now, where we are likely to see the next trade at 20 cents/lb and could breach the old highs of 23 cents/lb set back in 2012-2013.

LME Prices Also Scale New Heights

LME 3 months aluminum is at $2,173 as of March 12. CRU believes we could see prices reach $2,275 before pausing. The impetus behind the rally:

• Strong fundamentals on demand both in China and World ex-China.

• Stocks in decline and NO restarts of idle capacity in the World ex-China due to an inability to secure long-term power deals at a price that amortizes restart costs.

• Growing conviction that China will cap its primary production at 45 million tons (2021 output at 39.8 million).

• Costs of decarbonization beginning to be priced into medium-term expectations.

• Weakness of the U.S. dollar.

This sets up the market for real inflation. People love to talk about inflation. The reality is that unless you are above the age of 60, you most likely have never dealt with the effects of real inflation in the commodity world. Coping skills are either dull or non-existent.

Strap in, real inflation is here as the era of surplus is behind us and demand pull is going to provide some real excitement.

Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at gregory.wittbecker@crugroup.com

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