CRU Aluminum: LME Finds Firm Footing

The LME value went above $2,500 this week and supports a new trend line that may have bottomed at $2,300. The LME 3-month is $2,515 at press time versus $2,420 last month. Students of technical analysis are encouraged by the LME’s ability to hold key support levels above $2,460. However, the market is going to need reinforcement from the physical market before mounting any serious challenge of higher prices.

End users and service centers are in the depths of the summer doldrums. Crewing becomes an issue as operations are falling short of their fabrication goals and consumption of aluminum semis is slowing. As such, the market is quiet with few trades taking place. Further evidence of this slack demand period is that the Midwest Premium has floundered, drifting lower to $0.28 per pound, albeit on little trading volume. Firms holding Q2 inventory purchased at $3,000/metric ton LME and $0.38/lb Midwest premiums are anxious to purge these higher priced inventories and wait for a buy signal for the second half of 2022. That time may be upon us. Versus Q2 market prices, the same semis will be 20% lower today given the current LME and Midwest premium values.

This assessment of semis prices hinges on the LME and Midwest premium values alone as the conversion fees and fabrication fees for sheet, plate and extrusions have been remarkably stable all year. Even as demand may show weakness in a few end use areas, overall demand remains steady through July shipments. Mills have not shown any interest, nor is there evidence, that discounted prices are being used to move volume. Going into 2022, most mills and extrusion presses were booked full. Many products remain on allocation. A few mills may be offering open lead time bookings, but at the 2022 contract prices.

Looking into H2 2022 we have tempered our expectations on short-term prices, believing that the LME will average $2,425 for Q3. Q4 may see improvement to $2,500 –2,645/metric ton on the back of the Chinese stimulus package and a bit of improvement in Europe’s demand. The H2 Midwest premium forecast is in the current trading range $0.27-0.29/lb. In retrospect, the hyper-premium the market saw in Q2 was a by-product of the war in Ukraine, energy price sticker shock, and strong physical demand following 2021 that had aluminum consumers all metal short. Now six months into the new market reality, premiums have likely settled to their pre-war levels and will tend to stay settled through year-end, pending any unforeseen market upset.

The mills and their customers will begin 2023 contract discussions in earnest over the next few weeks. While many buyers were anxious to get 2023 nailed down back in Q2, as the price fell and inflation talk was in the air, the deal-making season fell back into its usual Q3 timeframe. Six months ago, on allocation and full of shippable orders, mills were looking for 5–10% conversion fee increases. A bit less certain of forward demand today, mills have lowered their target price expectations for 2023. Still committed to a year-on-year (YoY) increase for common alloy coil, an increase in the mid-single digits seem to resonate as recognition of cost cover for labor, energy, and materials inflation. Heat treat alloys, particularly plate-mill-plate in thicknesses .500-inches and heavier, will find supply still on allocation. Defense spending is on the rise, as is demand for aerospace alloys and tooling plate to support the investment in domestic semiconductor chip factories.

For primary aluminum production we now see China boosting production output by 4.2% during 2022, thanks to ample power supply in the extreme south. Chinese smelters are now running at a record 41 million-tons-per-year run rate. This marks a significant change in course from earlier forecasts from Q4 2021 when China had planned to curtail energy supply and consequently aluminum primary production would be lower YoY. While new, low-cost capacity is surging in the south of China, we have about 12,000 metric tons of the older, coal-based capacity losing money at current prices. We know from experience that the Chinese tend to be very deliberate about closures. Our expectations are that loss-making smelters will continue until the Chinese New Year (Jan. 22, 2023, this cycle). Traditionally, Chinese businesses likes to solve their problems and make the tough decisions at the end of the fiscal year, which coincides with the Chinese New Year.

World ex-China production will grow just 0.9% in 2022. This will be driven by the restarts in Brazil (Alumar) and Canada (Kitimat). The risks to European smelters remain grave and we are going to see growth curbed by the end of the year as high energy costs continue to confound operating margins. Closer to home, the recent shutdown announcements from Century Aluminum in Hawesville, Ky., and Alcoa in Warrick, Ind., further increase US dependency on imported ingot supply even as restarts in Canada and South America will help soften the growing deficit.

This then will strain the competition for well-sorted quality secondary metal units. Secondary metal continues to garner the talk of the industry with three new rolling mills announced that will increase the draw on the scrap supply stream when they ramp up to their anticipated volumes in 2026. Forecasting new rolled product sales for beverage can, automotive and service center applications, these three mills will require 1.7 million metric tons of slab to hit announced operating volumes.

By Steve Williamson, Research Manager, CRU Group

Learn more about CRU’s services at www.crugroup.com.