By Andy Home
LONDON – The outbreak of the deadly coronavirus could not have come at a worse time for the aluminum market.
Global aluminum demand fell last year for the first time since the global financial crisis.
Expectations of a demand recovery rested on China, which showed encouraging signs of a manufacturing revival towards the end of 2019.
The virus and the accompanying quarantine measures have since chilled economic activity, representing a short-term demand shock for the world’s aluminum market.
It’s why the London Metal Exchange (LME) aluminum price sank to a three-year low of $1,685 per ton at the start of February.
The fear is that China’s aluminum smelters will keep churning out metal even as the country’s demand implodes.
Since China is the world’s largest producer of primary aluminum, accounting for 56 percent of global output last year, this could have huge ramifications.
At the same time, China’s complex production logistics chain is undergoing massive stress and a supply shock is building upstream.
Aluminum usage is highly exposed to the construction and transport sectors, meaning a double short-term hit to end-use demand.
Chinese construction activity is being hampered by quarantine restrictions on workers returning from Lunar New Year holidays.
Already weak automotive sales look set to collapse over the coming months. Passenger car sales slumped by 92 percent in the first half of February, according to the China Passenger Car Association.
The more immediate concern is China’s aluminum processing sector, which converts metal into semi-manufactured products. Most fabricators tend to close their plants or at least run at reduced rates over the holidays.
Many are yet to restart, being in locked-down quarantine zones.
This processing chain disruption is causing a sharp build in aluminum stocks registered with the Shanghai Futures Exchange (ShFE).
ShFE inventory has surged by 224,508 tons to 409,635 tons since the start of January.
Increases over the new year holidays are the norm in China but the seasonal January-February build was a mild 75,000 tons last year and 88,000 tons in 2018.
Arrivals have been concentrated at exchange depots in Jiangsu and Henan provinces, with registered tonnage in Shanghai at a multi-year low of 10,218 tons.
That suggests a high level of regional divergence resulting from dislocated physical supply chains.
But the broader build in visible stocks is a warning sign that first-stage demand from the processing sector is failing to experience the “normal” post-holiday pick-up.
China’s smelters, meanwhile, don’t take holiday breaks. A smelter is not easily switched on and off and doing so costs money.
Chinese production slid by 2 percent last year but picked up strongly at the start of 2020.
National output in January surged by an annualized 425,000 tons relative to December and at 36.3 million tons represented the fastest run-rate since December 2018, according to the International aluminum Institute.
The disconnect with weak demand is likely to become ever more severe this month, raising the prospect of a massive inventory build.
This is a recurring nightmare for the aluminum market, which has spent much of the last decade working off the stocks accumulated during the global financial crisis of 2007/08.
Then too demand collapsed but smelters carried on producing fresh metal.
However, China’s giant smelter sector is itself dependent on both domestic and international raw material supply chains.
The country’s build-out of smelter capacity has made it ever hungrier for imports of bauxite from countries as far afield as Guinea and Ghana.
Imports of bauxite, which is converted to alumina to make aluminum, reached 101 million tons last year, a record high.
That flow of material is now also disrupted. Port stocks of bauxite have risen by around 5 million tons since the start of the year even while alumina refineries in Henan and Shanxi provinces are drawing down stocks to ultra-low levels, according to research house Wood Mackenzie. — Reuters
