Price unrest to persists in aluminium market

by: Casper Burgering

The aluminium price has suffered a lot this year; so far, it has lost 11%. In the year to date, the price level has fluctuated by 30%, which points to high volatility in 2018. Three events have caused the price to show major fluctuations this year. The question is whether the unrest has now dissipated and how the price will develop in the rest of this year.

Metals-Insights-Aluminium_20181019.pdf (126 KB)

In the first quarter and second quarters, President Trump caused big shock movements in the aluminium price when he introduced protectionist measures and raised sanctions against 24 Russian oligarchs (of which Oleg Deripaska, with a majority stake in Rusal, the largest aluminium producer outside China). The third quarter was relatively quiet, but the aluminium price experienced a downward trend due to the combination of a stronger dollar, weak Chinese economic macro figures and risk-averse investor behaviour. The tide turned at the end of August when the price rose in the wake of the news that the US and China would return to the negotiating table. That fuelled optimism amongst investors. The price went up initially, only to weaken again in early September due to the stronger dollar and weaker demand (mainly because of a holiday period in China). It became clear from the very beginning of the fourth quarter that the supply of alumina would be shrinking. Norsk Hydro has suspended a part of its activities in Brazil because of environmental regulations from the Brazilian government. This has caused a sharp rise in the price of aluminium, because lower availability of alumina adversely affects the availability of refined aluminium. That said, the upturn was short-lived, as the price subsequently dropped due to the stronger dollar and the sharp fall in equity markets worldwide. The extension of the deadline for the US sanction decision involving Rusal from November 12 to December 12 also caused the price to decrease.

What will the price trend be like in the last quarter of this year?

The price is fluctuating around USD 2,000/t and might even drop slightly below this figure in the short term if negative non-fundamental sentiments continue to dominate the news. The economic basis is, however, currently still good: the economy in the US is running at full speed, while growth in Europe and China does not disappoint at all. That provides a solid base. But turbulent times are not over yet for the aluminium price. In the last two months of this year, there will still be some interesting moments that will cause a fair number of price movements. Here is an overview:
– Sanctions against Rusal: on December 12, 2018 the US will decide on the sanctions against Rusal. Initially, the deadline was set for November 12, but because Rusal approached the US government with a proposal for changes to the board and governance structure, the deadline was postponed to December 12. Given these developments, it is plausible that the sanctions will not come into effect. If this is the case, the availability of aluminium will remain up to standard. Price reaction will be limited because this effect has already been partly incorporated into the price. If sanctions are imposed, however, the price will rise further as the availability of aluminium falls.
– Fed’s monetary policy: a week later, on December 19, the Fed is likely to raise interest rates. This will strengthen the dollar and have a depressing effect on prices.
– Aluminium capacity reductions in China: –similar to last year, China will limit the production of aluminium in some regions this winter on the back of environmental policies designed to improve air quality. Domestically this should not be a problem because there is no shortage of aluminium in China. The country already produces too much aluminium on a structural basis. The reduction in capacity will temporarily restore the balance in the market and that will have an upward effect on the price.

Demand for aluminium is high at this time, especially from the automotive and construction sectors. Without the current stocks, the aluminium market will be facing a deficit in the fourth quarter. This is a price-boosting effect. What is important in this context is that European-US relations do not deteriorate any further. An agreement on mutual import tariffs on cars would help to keep the demand for cars up to par. Relations between the US and China will also continue to be a key price driver. The question remains, of course, how investors expect the changes in US economic policy – and the resulting uncertainty – to impact future supply and demand. That is a major decisive factor in price movements. Although, on balance, ABN AMRO expects the price of aluminium to rise further until the end of the year. But given the fact that availability of aluminium continues to be sufficient, the increase in price will be relatively limited.