MethodologyContact usSupportLogin
In late 2020, China announced it would aim to hit carbon neutrality by 2060 and for its carbon emissions to peak by 2030.
Months later, in 2021, power shortages driven partially by carbon emission targets in various metal-producing provinces led to a reduction of aluminium production.
The country’s recent production has contracted for four straight months, according to the National Bureau of Statistics, mostly due to compliance with carbon emission targets ahead of China’s Winter Olympics in February.
Despite the reduction, the country remains the world’s leading aluminium producer and is forecast to produce 38.5 million tonnes in 2021, Fastmarkets research shows.
Consumption in China was also expected to grow in 2021 to nearly 39.9 million tonnes and is forecast to reach above 41 million tonnes next year, which will add to an aluminium deficit in both the Chinese and global markets.
“We believe global aluminium inventories will remain under pressure in the medium-to-longer term, and we are projecting a 1.44 million-tonne global supply deficit for 2022 – adding to the modest 0.825-million-tonne deficit in 2021,” Fastmarkets analyst James Moore said.
China’s deficit has drawn more tonnage into the country out of western stockpiles, such as the London Metal Exchange, shifting how western merchants are expected to transact in markets outside of China.
“After the winter, with all the issues China is having with the energy transition, we don’t see a whole lot of metal heading to Europe – unless there’s a big change on the China side,” a trader in Europe said.
Throughout the past year, aluminium sellers pivoted toward shipping metal to China, where the deficit market opened a favorable arbitrage between the Shanghai Futures Exchange and the LME. Aluminium prices and premiums surged globally, hitting record highs in 2021 to compete with China.
The aluminium P1020A premium, in-whs dup Rotterdam touched $300-310 per tonne in August, its highest in six years.
“The center of the world is no longer Rotterdam,” the trader said. “The change has been fundamental for now. If China continues on a path of its own… any available unpaid metal will find its way here.”
Aluminium P1020A premium, ddp Midwest US was assessed at an all-time high of 34.75-36 cents per lb in August.
LME warehouses held 1.3 million tonnes at the beginning of the year and held less than 900,000 tonnes at the start of December 2021.
The LME aluminium three-month price touched $3,000 per tonne on September 13, the first time it has hit that level since 2008.
Although the pull of China helped aluminium premiums and prices hit record highs in the west, it also makes trading in the west more complicated.
The stock drawing toward Asia, which helps fuel higher prices and premiums in the west, also means more volatile spreads on the LME, which translates into premium volatility as well.
Low volumes on exchanges essentially means aluminium spreads are more prone to squeezes, with less metal available to deliver on to alleviate a backwardation. That leads to more expensive carrying costs, which results in more cycles of market participants who can’t afford those costs liquidating metal into the physical market.
“If you want to be a trader, it’s extremely hard to structure a book in a way where you have a variety of goods with producers and be prepared for the eventuality of a backwardated market,” a second trader in Europe said.
Rather than sitting on a stockpile of metal and potentially getting caught by a wide backwardation, traders are positioning themselves to operate more nimble books in 2022.
It marks a shift in how traders have largely operated after Covid-19. Many stockholders purchased aluminium in the first half of 2020 when premiums were significantly lower, and have been carrying large amounts of stock since.
“It makes no sense to carry metal,” a third trader in Europe said, however. “Lightening the book makes sense. You don’t have slack in the system the next year.”
While spreads in January are in a wide enough contango to comfortably carry metal, that could quickly change, and traders will have to do a rapid turnover of metal to avoid carrying stocks into potential business-ending backwardations.
“If you’re lucky you can get a small contango on the cash/three-month spread,” a fourth trader in Europe said. “If you’re unlucky you are dead.”
The nearby spreads can also be more prone to volatility, depending on stock moves on the LME, which could also spell further volatility on premiums.
“You’re going to get this pendulum as the curve widens and narrows,” the third trader said.
The shifts will largely depend on seasonality, times of year when China needs metal and when it doesn’t, dictating how much supply will flow into LME sheds and, therefore, influencing the spreads.
With the Chinese market not as lucrative for now, metal has been returning to LME sheds, establishing a wider contango in LME spreads in December.
Volatility will also come with more market participants in the spot market when they need to cover metal and with fewer participants sitting on large stockpiles.
And although contangos support premiums, that can lead to upside risk as well to participants deciding to leave their books leaner.
“What is crazy is that the spreads have softened because China is not taking tonnes,” the third trader said, referring to spreads easing in mid-December after being in a wide backwardation for most of November.
“Everyone was trying to streamline their books [in late 2021] and thought they could go on the spot market and buy cheaper. They are now following with their strategy, and with a backwardation, it worked,” the trader added. “But with no backwardation on the horizon and a huge contango in spot versus the swaps, you get inquiries from these traders.”