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Steady global aluminium supply despite low demand

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This has been a much more challenging year for the global aluminium market than many had anticipated, with the Covid-19 pandemic resulting in a big hit to aluminium demand across the world. But while demand continues to be sluggish as the virus continues to spread, aluminium supply has largely remained in place, given the cost of idling capacity, Yang Cao, a senior research analyst for Fastmarkets MB, pointed out. He noted that this has resulted in a large surplus.

“Although the pandemic should bring negative sentiment to the market, aluminium prices have been ahead of market fundamentals this year,” Cao pointed out, attributing “the massive liquidity injected by governments” that, he said, has resulted in more hot money flooding into the financial market, pushing up financial assets’ prices. The LME daily official price closed at $1,755.50 per tonne on August 20, up from $1,621 per tonne a month earlier.

“Also, aluminium has been riding on the coat-tails of the rest of the base metals complex, particularly the copper market, which is fundamentally tighter,” John Mothersole, director of research for IHS Markit’s pricing and purchasing service, said, noting that this is supported by some encouraging data relating to copper coming out of China. “Broadly, base metals and other commodities are reading what is happening in China as a template of what is likely to happen around the rest of the world and pricing that in,” he explained. “But I believe that is a mischaracterization of what the aluminium recovery will look like.”

Since the current price rally has mainly been due to speculation, Cao said that aluminium prices could gradually retreat toward the end of the year to match the market fundamentals, although, in 2021, as demand recovers, prices should recover as well.
“We are in unprecedented times,” Jean-Sebastien Jacques, Rio Tinto’s chief executive officer said during his company’s recent first-half earnings conference call, stating, “Our industry has been hit by supply and demand shocks on a scale never seen before.”

“The Covid-19 pandemic has been a hugely disruptive event, imposing a multilateral shock to the global economic system,” Sucden Financial noted in its latest quarterly metals report. As a result, Geordie Wilkes, its head of research, said global demand for aluminium has been very weak. However, he said that it is hard to quantify just how much aluminium consumption will be down this year, especially given that the staggered approach to the pandemic-related lockdowns around the world could cause discrepancies between different regions and different countries.

That is even though in all the major regions of the world – China, Europe and the US – there has been a decline in activity in just about all manufacturing and construction spaces, which Michael Widmer, a metals strategist for Bank of America Merrill Lynch (BAML), said caused aluminium demand to fall everywhere. In fact, he maintained that the only aluminium end-use sector that showed at least slight improvement was packaging. But even that has been somewhat of a mixed bag, with foil and other packaging products used in homes seeing better demand than general packaging for food products, with more meals being cooked at home during the pandemic.

Jakob Stausholm, Rio Tinto’s chief financial officer, pointed that while the aluminium industry was already facing some fundamental challenges coming into 2020, the Covid-19 pandemic has added another pressure point for the industry.

“Most people were taken by surprise by the pandemic,” Pal Kildemo, vice president and chief financial officer of Norsk Hydro ASA, said, noting that while every year brings something new, this year has been a little bit more extreme. “We aren’t sure what the fourth quarter will bring, but we believe there will be stronger demand than we experienced in the second quarter,” he said.

Cao estimates that total world aluminium consumption was 15.264 million tonnes in the second quarter of 2020, down by 7.7% from 16.53 million tonnes a year earlier. Chinese aluminium consumption during the quarter was down by 4.2% year on year to 9.315 million tonnes and second-quarter aluminium demand in the rest of the world was down by 12.1% to 6.345 million tonnes from the like quarter in 2019. Meanwhile, he expects that for full-year 2020 global aluminium demand will be down by 7.2% from 2019’s level, with China witnessing a 3.5% year-on-year decline, while aluminium consumption in the rest of the world declines by 12.0% to 24.82 million tonnes.

“We have seen some signs of improvement in the last couple of months, supported by the fact that there have been fewer lockdowns and more stimulus measures being injected across the globe,” Wilkes said. But he is uncertain how much such movement in the second half of the year will offset the losses that had been incurred in the first half or if demand will simply plateau, especially given that he believes that much of the recent stimulus measures are unsustainable over the long run.

“It is clear that the Covid pandemic will be with us for some time,” making it difficult to say with absolute certainty what the shape of the recovery will be, Jacques said, explaining that big questions remain over the trajectory of consumer spending globally and the rate of reopening country by country, as well as the risk of a second or even third wave of virus occurring.

China’s recovery

The rate of recovery has been varying region by region, Cao observed, with market conditions improving in China while the rest of the world continues to be hit quite severely by the Covid-19 pandemic. Mothersole said this is not surprising given that China was the first country to be affected by the pandemic, the first to go through a lockdown and the first to open up again. “They have appeared to have done a good job in controlling the spread of the virus and their relaxation measures that rebooted their economy have been proceeding reasonably well,” he said.

As a result, the pace of Chinese aluminium demand began to pick up again, starting in the second quarter even stronger than the market had expected, Kildemo said, largely attributing that to a combination of pent-up demand, government stimulus across various end-use markets, including construction and transportation equipment, and some aluminium stockpiling measures, which he said has resulted in a greater metal oversupply situation than the market dynamics would indicate.

He noted that while even in China most end-use markets continue to lag 2019 levels, that is not the case in the auto sector, where, in addition to pent-up demand, subsidies for both electric vehicles and for autos in general has been stimulating consumer demand. In fact, according to the China Association of Automobile Manufacturers, Chinese auto production increased by 6.3% month on month and 22.5% year on year in June on the back of a 4.8% month on month and 11.6% year on year increase in sales.

Kildemo noted that the production of more electric and hybrid vehicles is particularly positive for aluminium, given the need to lightweight those vehicles to compensate for the weight of the battery and to increase their range.

China’s building and construction sector has also been recovering strongly, although, while Chinese construction starts were up by 3% year on year in May, Wilkes said that year to date they remained 13% below those during the first five months of last year, despite recent government stimulus. He said that while the stimulus measures aimed at the construction sector, particularly infrastructure construction, have been working, the problem is that Chinese sentiment is still pretty fragile, and with concerns about its asset bubble the government has decided to step back some of its previously announced stimulus measures.

“But we are starting to see some growth come back into the market, which is very positive for aluminium demand,” Wilkes said, noting that Chinese land sales were up by 36% year on year in May, with property starts increasing by 2.5%. “But that is coming from a very low base,” he pointed out.

Mothersole noted that the Chinese monetary and fiscal stimulus measures have been supporting growth of targeted investments for high-speed rail, a big user of aluminium rolling stock, and for electric grid interconnections, including in investments in transmission lines that use aluminium cables. “China has also recently lowered electricity tariffs 10 to 15%,” which, he said, is helpful for aluminium production there.

Meanwhile in the Americas

There has also been some improvement recently in aluminium demand outside China, Roy Harvey, president and chief executive officer of Alcoa Corp, recently told investors during the company’s second quarter earnings call. He stated that some high-level manufacturing and aluminium end-use market data showed some signs of improvement in both the US and Europe starting in May and June, supported by a recovery in manufacturing activity there, especially with US auto plants getting back to work in mid-May. “A full recovery, however, will take a little longer than expected,” BAML’s Widmer said, predicting that it won’t be until sometime in 2021 that demand outside of China will get back to normal. Others say it could even take longer than that.

Kildemo said that Hydro has become more concerned about demand in North and South America, where, while there has not been a second wave of the pandemic yet, there has been a longer than expected first wave, which could mean that the Americas are at high risk for the pandemic to be extended.

While in the US aluminium demand has recently been picking up, Wilkes said that he believes that the reopening up of some businesses there could have been premature and that there have begun to be some issues because of that. US manufacturing activity has started to pick up, as can be seen by the US Institute for Supply Management (ISM) manufacturing purchasing managers index (PMI), which not only returned to expansionary mode in June, but continued to rise to a reading of 54.2% in July. “But the recent pickup in Covid cases has resulted in a very fragile and precarious situation in the North American aluminium market," Jean Simard, president and chief executive officer of the Aluminium Association of Canada, said.

Wilkes noted that US aluminium shipments were down in the first half, including a 34% decline year to date through May for extruded production and a 28% year to date decline for flat roll, largely due to the two-month lockdown of US auto plants. Cao said that Fastmarkets MB is forecasting overall US aluminium demand to be down by 12.7% for full year 2020, before recovering by about 10% next year. This, he said, comes as US automotive sales continued to slump even though automakers restarted their operations in mid-May.

Simard said there has been a decline in demand for value-added aluminium products – not just in North America but throughout the world – forcing most smelters to make more P1020 commodity ingot and less value-added product in order to keep their operations going and to avoid potline disruptions.

The impact on aluminium producers, however, was somewhat offset by increases aluminium content in North American vehicles, with automakers continuing to look to lighten the weight of their vehicles to increase fuel economy and to lower greenhouse gas emissions, Matt Meenan, a spokesman for the Aluminum Association said. He pointed out that not only has the aluminium content per vehicle been increasing year after year, but a new survey conducted by DuckerFrontier indicates that the average content will grow to 514 pounds per vehicle by 2026, which is up by 12% from 2020 levels.

US demand for aluminium for packaging applications has been positive this year. Meenan said US can stock shipments have been positive this year, rising 6.6% year on year in June. Kildemo said that demand for aluminium foil is even stronger than for can stock.
Wilkes said that the US construction sector is starting to improve, especially residential construction, with US housing starts rising by 22.6% in July to its highest production rate since February. However, the uncertainty in the market has caused overall construction spending to tail off in recent months, and there is concern how it will fare going forward, especially for non-residential projects.

Europe has also been hit hard by the pandemic, and despite strong stimulus measures aluminium demand there is still weak, Wilkes said. Conditions have started to improve as European countries come out of lockdown, although at differing rates country by country. He said that while France and Italy saw upward growth in June, Germany continued to see some declines.

“Overall European demand has been a worry, especially in the auto sector where registrations were down 24% year on year in June and sales were down 56.8% in May,” and with the European manufacturing PMI remaining contractionary. While there is some hope for a brighter fourth quarter in Europe, Wilkes said that he does not expect to see much growth on a year-on-year basis during the third quarter.

Trade issues lurk

While trade issues have recently been overshadowed by the pandemic, they do continue to be of some concern, particularly the re-escalation of trade tensions between the US and China coming at a time when the recently negotiated Phase 1 trade agreement has not yet taken effect. “But while I would expect that going forward China and the US will go their separate ways more and more,” BAML’s Widmer said he does not believe that the market has been all that worried about that.

Nevertheless, given that the US presidential election is coming up in November and questions of whether China will indeed fulfill some of its purchase pledges in the agreement, citing extraordinary circumstances, Mothersole said a big question is whether the Trump administration might “blow up” the agreement at some point.

Another controversial trade issue has been the Trump administration’s decision to reinstate 10% Section 232 tariffs on US imports of P1020 commodity aluminium ingot from Canada shortly after the US-Mexico-Canada Agreement (USMCA) replacement to the Nafta trade pact, which Simard called “the poster child of the US administration,” went into effect. He called this move “a political oxymoron” that adds a new layer of uncertainty to an already uncertain business environment, especially given that the Canadian government is now considering retaliatory measures – a dollar-for-dollar 10% tariff on a number of US aluminium imports, including primary metal and various consumer goods.

Simard also contested the reasoning for this move, which was a reported surge in Canadian aluminium imports into the US. While he admits that Canada increased its imports of P1020, he said that is not the case for its total aluminium imports into the US.
Tom Dobbins, Aluminum Association president and chief executive officer, also expressed disappointment in this decision, stating, “This Groundhog’s Day revival of Section 232 tariffs on a key trading partner does not address the underlying issue of China’s overcapacity.”

“This move is expected to be devastating for US downstream producers and end-users,” Cao said, given that they will not only need to pay the tariff but also the higher US Midwest premium. Many others agree, including an Alcoa spokesman, who said, “Implementing these tariffs on a vital, free-trading partner will cause unnecessary disruption for downstream producers across North America and further distort the market.” A Rio Tinto spokesman said this move undermines market confidence in secure supplies of aluminium in North America and is a distraction from implementing the USMCA, while a Hydro spokesman said any actions taken should be made in line with WTO regulations.

Production rolls on

Even with the weakness in demand, production has remained pretty high throughout this year, with very little primary aluminium capacity having been idled, partly due to the cost of doing so.

Cao is forecasting global primary aluminium production will only be down by 0.1% this year before rising about 3.5% in 2021, resulting in about a 4.1 million tonne global surplus.

“Everyone is pointing to China to do more to control their overcapacity situation,” Mothersole said, but he said it is making decisions based on its best interests, to support its economy and specific industries. “I think that even they recognize that there is too much aluminium capacity and production, but politically they are right now unwilling to make hard decisions,” he said, although they might have to in order to avoid trade actions to isolate China from the rest of the market.

There have been some curtailments of capacity. Kildemo observed that there have been some small ones in North America, Argentina, New Zealand and Europe, as well as about 600,000 to 700,000 tonnes in China, “But that is less than is needed in light of the falling demand.” Simard noted that the closures in China were replaced by new capacity.

“We aren’t sure what the third and fourth quarter will bring to the aluminium market,” Kildemo said. “We are cautiously optimistic that there will be stronger demand than we experienced in the second quarter, but we are also well prepared for things to weaken again given that the pandemic is still spreading actively in some parts of the world.”

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