CRU: New Uncertainty Creates Challenges in Aluminum Pricing

Markets are getting tighter as demand remained strong throughout all end-use segments through February. Costs all around are rising, from shipping to warehousing, and logistics is becoming more complicated as the war continues and the prospect of new sanctions are considered. The cash to LME 3-month Contango is slowly widening, while forward markets remain slightly backwardated into 2023. Widening contangos inspire more confidence in traders to hold their metal longs as financing costs are being recouped again.

These factors are decidedly bullish, however, this week the sentiment in the market saw a more negative tone. Last month I mentioned a few ways demand destruction could be seen off the announcements of the first Federal Reserve interest hike to combat high inflation. While this has not affected demand yet, market participants are skittish due to the risk it represents.

A large majority of those holding metal are in a profitable position. Should the price hit a perceived peak and trigger a sell-off, the risk is that it could drop hard and fast. This, along with all other challenges across the market, has kept the premiums from going any higher this week.

Billet pricing also seeing cost-push inflation in the spot market

Billet is also facing its own challenges. The spot billet rate has hit $0.35 per pound to $0.50 per pound over the Midwest premium. A part of this includes a freight premium that has been implemented recently.

With the rising prices of fuel and logistics, billet producers have passed that through onto the consumers with a $0.2 per pound to $0.3 per pound premium. The price of magnesium, silicon, and manganese are also triggering new pass throughs because these prices are holding up higher and higher than previously expected. 

A challenge for 2023 contracts

These factors along with the tightness of the markets represent a challenging environment for rolling mills and extruders. With demand staying strong, many are concerned about potential supply shortages. Lead times for extrusions have also been reported extending up to a year in advance.

This has pushed annual contract negotiations to start earlier than usual. Market participants are testing the waters for 2023, seeking supply surety earlier than ever before. The higher volatility and uncertainty in both the cost of raw materials, as well as the economic conditions created by inflation, make discussing these contracts very difficult. Sellers are naturally reluctant to commit to fixed premiums this early, while buyers are seeking more certainty.

We expect negotiations will be drawn out and painfully slow to come to closure.

There are also two high margin markets that have yet to recover fully from the pandemic, automotive and aerospace. Capacity from these markets have been redirected to other high growth markets such as can sheet. If these were to kick back online in any significant way, it would create more of a supply crunch going into 2023.

Matthew Abrams joined CRU in January 2022 as a Research Analyst, focusing on aluminium rolled products. Prior to joining, he was finishing his degree from Konkuk University in Seoul, Korea where he studied Economics and Statistics as well as the Korean language. Matthew is based in CRU’s Pittsburgh office. He can be reached at matthew.abrams@crugroup.com.

CRU also covers the alumina market comprehensively. Please contact Lais Santos (lais. santos @crugroup.com) or Anthony Everiss (anthony. Everiss @crugroup.com) to explore CRU’s alumina coverage.

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