China and aluminum
As noted in the previous parts, China’s aluminum production rose almost 19% year-over-year last month, while the country’s unwrought aluminum exports rose only 2.6% during the period. The country’s aluminum demand was also likely lower last month, as compared to the corresponding month in 2016, due to the early Chinese New Year holiday in 2017.
With record aluminum production and subdued demand, then, one would expect a tsunami of Chinese aluminum exports. But this was not the case last month. So what did China want with so much aluminum?
Inventory buildup
According to a Shanghai Metals Market report, “Inventories of aluminum in China’s five major trading markets were 905,000 tons as of February 20, surging 319% from the record low of 216,000 tons seen on September 29, 2016, and 166% from the level seen in early 2017.”
Higher aluminum production in January seems to have found its way into warehouses. However, we should remember that real demand, or demand from end users, drives metal prices. Inventory build-ups—as we’ve seen in China—don’t provide much support to commodity prices (DBC) (RIO).
LME inventory
While China’s aluminum inventory has surged, LME (London Metals Exchange) aluminum stocks have also risen slightly, as can be seen in the above graph. Notably, prior to 2017, LME aluminum inventory has been falling, after hitting ~5.5 million metric tons in mid-2013.
The increase in inventory could put pressure on aluminum prices. But for now, positive sentiments and higher input costs have provided support to aluminum prices. However, if Chinese aluminum production continues to rise without a commensurate increase in demand, we could start to see higher exports from the country again.
Of course, any increase in Chinese aluminum exports could negatively impact aluminum prices and producers, including Alcoa (AA), Century Aluminum (CENX), and Norsk Hydro (NHYDY).
Keep visiting Market Realist’s Aluminum page for ongoing updates on this industry.
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