CRU on Aluminum Fundamentals: Primary Deficits to Swell in 2022

CRU has recently updated its expectation for market balances, premiums and LME prices. These forecasts can be seen in detail through our Aluminum Market Outlook subscription.

Here are our key expectations for the coming months:

• Demand–We now expect to see World ex China demand slowly taper off as we move into 2022, with 2022 consumption at 4.1% coming after a 14.1% rise in 2021. Chinese demand in 2022 will be markedly softer, with our view that Chinese demand will be flat, highlighted by a decline in demand of 4.1% during the first quarter. Consumption in China will only turn positive in the fourth quarter. The major drivers behind this pessimism are the weakness in construction due to threats to major private developers, power shortages that will impair industrial output and the automotive market suffering through the chip shortage

• Production–World ex China primary production is expected to rise 3.7% in 2022, highlighted by some restarts coming in response to very favorable LME prices. The recent news about Alcoa’s restart of its Sao Luis, Brazil, plant during 2022 will be followed by other restarts at Kitimat, Mt Holly, and Portland. Chinese production will FALL in 2022 by 2.5% as power shortages will remain problematic.

• Inventories–The market will continue to drain remaining stocks on the LME and trader-held unreported inventory. Stocks will finish 2021 at around 50 days. 2022 will see stocks expressed as days of consumption fall to 36 days. By 2024, CRU believes stocks will hit a record low of 32 days. Bear in mind that historically, any time stocks have fallen below 45 days, it tends to lead to higher prices and increased volatility.

• Market Balances–CRU believes that 2021 will finish with a world aluminum deficit of 1.47 million tons and that 2022 will see an even bigger deficit of 2.49 million tons. This is the impetus behind that large decline in inventories as the market scrambles to compensate for the lack of supply. The timing of restarts and stability in Chinese power supply will be the critical variables in moderating this big deficit

• LME Price–Notwithstanding the recent pullback from 13-year lows of nearly $3,300 on the 3-month contract during mid-October, we believe the LME price remains very dangerous and skewed to upside risk. Our view is that prices for the fourth quarter will recover to average slightly over $2,900 and will enter 2022 with fundamentals pointing towards another test of prices above $3,000, with 2022 averaging just under $2,900.

• Midwest Premiums–Unquestionably we are heading towards the traditional year-end slump in demand when consumers like to destock and clean up their balance sheets by reducing inventory and generating as much cash as possible. Many observers are concerned that the supply chain issues are starting to hurt demand as people can’t get materials to produce, the labor to process the materials or the freight to ship the finished product. All combining to curb short-term demand. We believe that these factors could cause premiums to sag during the remainder of the quarter, but also believe traders will demonstrate their usual willingness to take on fresh long positions if premium discounts are attractive. The fundamental deficit for 2022 will act as a substantial brake on premiums free-falling, and our view is that premiums for 2022 will remain well supported in the low 30’s. This assumes no structural change in Section 232. 2023 could be a markedly different story as the effects of restarts and new production should temper premiums, with a return into the 20’s.

LME and U.S. Midwest Prices Falling

LME prices are ending the week on a weak note, with the market now around $2,600 on the 3-month contract. A test of lower support around $2,530-2,550 looks likely. At the same time physical premiums are sagging, with the Midwest premium now just under 30 cents/pound. The easing of concerns about Chinese power, lifting of Russian export duties and the seasonal decline in demand at year end are mixing up a strong cocktail of bearish news. However, as our fundamental view details, we believe this pessimism may dissipate in early 2022 as the underlying supply-demand reality starts to manifest itself. Supplies will be tight, and the clearing price will eventually need to reflect that.  

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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