Steel Mills
CRU Aluminum: Banking Sector Woes Dent Macro Sentiment
Written by Matthew Abrams
March 19, 2023
The macro environment in the US has proven to be extremely volatile and continues to change on a month-by-month and sometimes even week-by-week basis.
Last year ended with worries about an incoming recession as the Federal Reserve hiked interest rates to slow the economy. As 2023 opened and year-end economic data trickled in, the figures were better than expected and provided a bit of optimism.
One example: pundits and economic experts shifted their rhetoric from “hard” to “soft” to “no landing” when discussing the end results of the Fed’s moves.
Just this past month, inflation was proving to be more stubborn than expected despite softening eight months in a row. This had markets pricing in more interest rate bumps from the Fed almost immediately. Some “good news” in the fight against inflation came as unemployment rose and the job market cooled slightly. Another rate hike, but of a lesser amount, was expected.
Then came the issues with the banking sector as Silicon Valley Bank (SVB) collapsed. Markets are now waiting to see just how widespread the effects are. The crisis at Credit Suisse added to the uneasiness. The banking sector’s struggles make it harder to judge both the health of the economy and what the Fed will do next. The fixed-income market has seemingly shifted to expecting an interest rate softening toward year-end 2023, which is a change from what was originally being priced in.
These issues are important to consider when looking at both aluminum demand and pricing. For example, SVB was one of the largest West Coast lenders in recent years. The West coast is also the second-largest region when it comes to private, nonresidential construction investments. Any weakness in the banking sector there could put a damper on future projects and work to suppress the volume of construction. In a year where residential construction is slumping, nonresidential is vital to support end-use demand for aluminum.
The interest rate moves by the Fed are also vital to the strength of the US dollar and thus LME pricing. Last year, the LME was softening due to the strength of the greenback. In January, we saw this price jump more than $300 per metric ton due to a few factors, one being that interest rate increases were expected to slow and the dollar strength to soften as a result. This ended up being a premature move, and the price fell over the next few weeks. But there was still a consensus that this would be a bullish factor as 2023 played out. Now with banking sector uncertainty added to the mix, we could see interest rates fall much faster than anticipated.
Near term, this has resulted in the LME shifting down near its 60-day low point of just over $2,200 per metric ton. The uncertainty present in the market is a key driver to this lower price as end-use demand is an even bigger question mark. The other half of the Midwest Transaction Price, the Midwest premium, remained stable over the past week and only slightly softened down to $.285 per pound from $.29 per pound. The spreads on the futures curve show there could be weakness, however, as there is a large backwardation of $.03 per pound, which is unsustainable in normal conditions. Thus, the premium could also soften further in the near term depending on how end-use demand responds.
Smelter Restarts Rely on a Higher LME Price
This year, the aluminum market is expected to be incredibly close to being completely balanced. With inventories low and LME warehouses with just 40 days or so of inventory, any big shifts on either the supply or demand side will affect prices almost immediately. One big piece to this supply/demand balance is smelter restarts. A few high-cost smelters are still curtailed in both the US and Europe. These smelters will need to see higher LME prices or a softening of producer input costs, mostly in the form of energy, to have hopes of reopening. This capacity will be needed to keep up with the return of demand globally and to balance out potential supply disruptions such as curtailments due to droughts in China. The stage has been set for 2023 to be another volatile year when considering the geopolitical climate, macro challenges, and tight market balance.
By Matthew Abrams, matthew.abrams@crugroup.com
Matthew Abrams
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