Premiums for aluminum in the US took fell again last week following a period of stability after the Federal Reserve stepped in the wake of the closure of Silicon Valley Bank (SVB).
Economic struggles have continued to depress shipment volumes into Q2, and many major macro data points are still muddied.
Last week another bank was forced to close with potentially more on the way. Banking woes, once thought to be contained, now appear to be spreading.
The most important trickle-down effect for commodities is in consumer confidence. Bank shutdowns and worries about deposits could further hamper consumer spending, which is already down due to the combination of high inflation and rising interest rates. They also threaten to increase volatility in the markets as banks, especially small to midsized ones. They are more susceptible to moves in sentiment, which are often reflected in their stock prices. If more banks start to feel pressure, which looks likely, liquidity in the markets, and thus lending for bigger projects, could be significantly affected.
On top of that, the Fed chose to hike rates again in its fight against persistent inflation. Worries are starting to build because in the past, rate hikes historically took around 18-24 months to have a meaningful effect on the real economy and consumer health. That means the current rate hikes will hit sometime next year, which could make a recovery from a slow Q1 difficult. The higher interest rates, offered as risk free, are now in line with many corporate bonds. This is another factor that makes lending for companies even tougher going forward as they compete with riskless treasury bill rates.
It is safe to say that aluminum producers in the US are already feeling the crunch as lead times have come way in, and the overall mood is much more cautious. Even paper trading on the premium has slowed immensely with tight spreads on the LME and higher costs of carry due to higher interest rates. More OEMs are starting to hold off on ordering in advance and are instead taking a wait-and-see approach because of high levels of uncertainty.
Automotive, aerospace, and defense applications are still booming. Dealer inventories are still at record lows despite the easing of supply chain issues and rising build rates. Defense contracts are rapidly appearing, which have kept hard alloy applications at extended lead times. There has been a steady stream of increased build rates from most airplane manufacturers as well. These three areas of the market will be vital to buoy demand in the face of weaknesses throughout other end use segments.
East Asia Struggling Too
Elsewhere in the world, similar problems are playing out. Much attention has been directed toward the US housing market, Europe and the effects of the ongoing war in Ukraine, and China’s restart post zero-Covid lockdowns. Other regions are facing their own challenges. One example is Asia, ex-China, which has recently seen a downgrade in expected economic growth.
Case in point: On the ground in Korea, one of the larger economies in the region, the mood is cautious. Inflation has continued higher throughout the beginning of 2023 and has started to work its way down to the consumer. Exports make up such a large portion of GDP that disruptions in the global economy threaten to hurt their domestic economy almost immediately. Given that, domestic Korean companies have to be flexible in responding to global trends.
Last year, Korean automotive OEMS were able to take advantage of the global shortage in inventories as exports spiked to their highest level ever and look to continue building on that momentum. Samsung is another recent example. The company struggled in Q1 because of a drop in demand for semiconductors used in computer chips, and inventory built to record levels. They now look to pivot to automotive end-use chips because of continued strong demand in that sector. They are also looking to take advantage of the relationship built between the US and Korean governments and to find ways to mesh with recent legislation, such as the Inflation Reduction Act and the CHIPS Act.
The effects of US Monetary policy are also felt by exporters. The interest rate differential between the US and Korea is at an all-time high, which is a risk for additional capital outflows and volatile exchange rates. Japan is in a similar position. With the two economies focused on exports, controlling inflation and trade balances is much more difficult.
Learn more about CRU’s services at www.crugroup.com
By Matthew Abrams, CRU Research Analyst, firstname.lastname@example.org
Matthew AbramsRead more from Matthew Abrams
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