CRU: Primary Aluminum Supply-Demand Update

Growing Deficit in 2021 Driven by Chinese and Canadian Production Excursions

CRU has substantially increased the size of the global deficit for 2021, moving it from a 240,000-ton surplus to a deficit of 1,180,000 tons.

Demand remains robust outside of China, likely to rise nearly 13% from 2020 levels and on par with 2019 pre-COVID levels. China is slowing, with growth now projected at 6%. China is experiencing a larger than normal seasonal slowdown, with the semiconductor shortage having a major impact. There are also liquidity concerns amongst major Chinese property developers that may stunt demand from the construction markets.

The biggest contributor to the major shift in the balance comes on the supply side, where there has been a steady stream of unintended disruptions.

Within China, energy shortages in Guangxi and Yunnan are compelling short-term curtailments for smelters in both areas. Yunnan-based Shenhuo has been forced to curtail 39% of its 900,000 ton/year smelter or 351,000 tons/annualized. In Guangxi, aggregate curtailments of 330,000 tons/annualized are taking place. Some new projects have been forced to delay start-up due to the lack of power availability.

Concurrently, in Xinjiang, local authorities are requiring smelters to reduce run rates where it has been found they were exceeding installed capacity. This is likely to affect three smelters with a combined impact of 126,000 tons/annualized.

Last, but not least, massive flooding in Henan knocked one major smelter offline, which will compel a 2-3 month restart process.

As previously discussed here, within North America, the Rio Tinto smelter at Kitimat, British Columbia, remains on strike and is likely to remain so for a long time. Approximately 250,000 tons/annualized is impacted from the closure of 65-70% of their capacity.

Physical Premiums Continue to Set New Records Expressed Versus LME

The U.S. Midwest duty paid ingot premium for 99.7% ingot is now at 35 cents/pound. Forward quotes on the CME Premium Contract are in backwardation, ranging from 31.9 cents/pound for October 2021 to 25.8 cents/pound for August 2022.

Nearby, the market seems convinced that there’s little to bring relief to the supply side tightness unless fresh imports from LME warehouses in Asia can arrive in the fourth quarter. Even then, most traders are not convinced that the spot premium won’t roll forward, and the forward CME price curve seems to be attracting more buyers than sellers.

Handicapping the forward premiums into 2022 seems to be a pure bet on the odds of the Biden administration lifting Section 232 and the expectation that new supply contracts from offshore WILL raise imports.

The longer that prices and premium stay high, the greater the probability that end-users such as the automakers, beverage companies and other ultimate holders of price are going to be clamoring for Section 232 to be abandoned. That pressure will likely build in 2022 ahead of the mid-term elections.

More fundamentally, offshore suppliers now have a chance to reset their export allocations for 2022, and the strength of the U.S. market will undoubtedly bring more supply here. One exporter that likely will NOT benefit is the Russians. While the Russians have a great product and a highly professional commercial team, they face a daunting task of convincing buyers not to be concerned over political risk…namely sanctions. We believe this will be a major impairment to their ability to land new sales for 2022.

The Long View: The Nearby Deficit May be a Sign of Things to Come for the Next Decade

The market naturally is fixated on the spot tightness and the high premiums. This may not be an anomaly. CRU’s long-term outlook suggests that deficits may be a recurring feature of the market out to 2030.

China appears to be serious about capping its primary production, and its exports will be more selective. They also face serious challenges in exporting products to markets where (1) they are blocked by antidumping action, and (2) they face more questions about the carbon intensity of the products they want to export.

In 2021, China will again be a large net IMPORTER of metal. As primary capacity flat lines after 2025, we may see persistent Chinese imports.

The World ex China has grown very accustomed to China “exporting deflation” in the form of cheap aluminum. That’s going to end, and that could be a real shock to the system. London Metal Exchange (LME) prices have been used to using Chinese capital costs to set the clearing price for aluminum for over 15 years. We are now at an inflection point, where the market may need to turn to World ex China capital cost replacement as a more realistic clearing price.

Low Chinese capital costs and the corresponding LME price have stunted World ex China investment. We have a low pipeline of new projects projected to 2030 – about 4.7 million tons. That’s not going to pace demand growth, which means more and possibly bigger deficits.

2021’s deficit may be a taste of things to come. Consumers will be well advised to re-think their lean inventory practices, the duration and integrity of their supply contracts and their price exposures for 2022 and beyond.

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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