FOCUS: LME Al price hits Dec 2016 low; coronavirus fears stoke uncertainty in market
Aluminium market participants remain wary of reduced consumption, logistical backlog and bearish macroeconomics as a result of the coronavirus outbreak from Wuhan city in Hubei province, China.
The outbreak has pressured futures prices on exchange for primary aluminium and have stoked growing bearish sentiment in the secondary aluminium and scrap market. The effect of the coronavirus on global aluminium premiums, however, remains uncertain.
The London Metal Exchange three-month aluminium price closed at $1,686.50 per tonne on Monday February 3 - the lowest since December 29, 2016 - it has since re-bounded slightly and traded at $1,716 per tonne as of 9:15am London time on February 4.
Aluminium’s declining exchange price was in focus on Monday, with the Chinese market returning from its holiday and the rest of the world watching to gauge the virus’ effect on the market.
“While the full impact on commodity markets from China’s efforts to contain the 2019-nCoV virus will only be apparent in the coming months, prices are already looking toward a pocket in demand while the seasonal post-Chinese New Year surge in activity is stalled,” Colin Hamilton, BMO head of research, wrote in a note.
The current market conditions also sparked significant interest in the aluminium futures contract on Monday, with 25,075 lots traded on the LME three-month aluminium price by the 5pm close - its highest volume since October 3, 2018.
“Look at that close price, all the consumers are ringing wanting to close contracts,” an aluminium trader said.
Low LME prices have helped spur demand in Europe from consumers looking to finalize long-term contracts, other participants said.
“People are locking in lower [LME] prices, they’re willing to negotiate for billet now. They look at the math and it covers their contract and they’re good to go,” a second trader said.
The Shanghai Futures Exchange reopened on Monday February 3 for the first time since January 23, despite regions in China remaining closed until February 10. The exchange’s active aluminium contract hit 13,510 yuan ($1,931.85) per tonne on February 3, the lowest in almost a year, and was relatively flat on Tuesday February 4.
“The drop in the SHFE was expected,” the first aluminium trader said. “There was an arbitrage for a while with the LME price dropping so dramatically, but if the SHFE price continues to fall it will give us a good indication of what’s going on with smelters.”
Despite the downtrend in the futures market, physical prices and premiums for aluminium have yet to react, although expectations of a weaker aluminium market are already growing.
Participants face uncertainty surrounding the extent of the demand impact in China from the coronavirus, and whether the disruption to demand will bleed into western economies.
“It depends on the slowdown in China, if there is one does that mean there will be a slowdown in the west as well?” a third trader said. “Does this leave the west very long of metal? There are unknowns.”
Active aluminium traders in the Asian scrap market have already experienced a drop off in demand, with the Lunar New Year extended to February 10 and restrictions on the movement of people and goods in the country.
“I can’t get anything done because of the Chinese New Year holiday’s extension due to the virus, I’ve got shipments no one can do anything with because [the buyers] are locked inside an apartment somewhere in China,” a fourth trader said.
A potential steep drop in scrap and secondary aluminium demand could influence secondary aluminium markets around the world. Before the outbreak and the start of the holidays, China’s increased demand for aluminium scrap and secondary ingot helped prop up global prices.
Fastmarkets last assessed the aluminium ingot ADC 12, exw dp China premium at 14,100-14,800 yuan per tonne on January 29 - down from 14,300-15,100 yuan per tonne on January 8, its highest since November 2018 - mostly due to the seasonal holiday slowdown. Fastmarkets will next assess the market on Wednesday February 5.
The reduced price paid for aluminium ADC 12 meant Fastmarkets’ assessment of the aluminium pressure diecasting ingot DIN226/A380, delivered Europe premium increased to €1,400-1,460 ($1,548.22-1,320) per tonne on January 24, its highest since last April - and a range it maintained on January 31.
The drop in demand amid the outbreak, as well as the reclassification of aluminium scrap and ingot leading to more domestic production of ingot, could remove the support the Chinese market gave to other markets.
“We’re able to sell much higher [in Europe] because of demand from Asia but the concerns are now [both the virus and the fact] they’ve redrawn what scrap they have to make their own ingots so that in a short space of time they won’t be so desperate to buy from us,” a fifth aluminium trader said. “So, the price will go down [in Europe].”
Primary premium uncertainty
For now, participants believe most of the reaction on the physical side is coming from the secondary aluminium market - with P1020 aluminium premiums untouched.
“The market has to keep an eye on [what happens in scrap] because everyone is consumed,” the fourth trader said. “It’s not hitting P1020 [premiums] but when you’re trying to do deals with people, they’re wrapped up in working out what they’ll do with secondary and scrap. It’s time consuming for everyone and slowing the market down.”
Others noted China’s lack of imported primary aluminium - roughly 162,000 tonnes in the first half of 2019, according to the World Bureau of Metal Statistics - has also kept global premiums apathetic to the outbreak for now.
Participants, however, wonder what will happen with Chinese exports, particularly, semi-fabricated aluminium products.
“The expectation was that the surplus built in China comes out and displaces P1020, but frankly nobody knows the extent [of the effects from the outbreak] yet,” a sixth trader said. “Also, it’s hard for sellers out of China to make commitments without knowing if they could logistically pull it off.”
China exported around 444,000 tonnes of primary aluminium in the first half of 2019.
“If Chinese smelters are affected by the virus, there will be less Chinese semis coming out,” the second trader said. “If Chinese automotive production is completely shut down, the semis for Chinese consumption could be exported.”
For other participants, the continuation of everyday life in China remains a priority.
“When I spoke to our team in China, they’re hunkering at home and sending out one person for food - they don’t want to waste masks and respirators,” the second trader said. “Productivity will be hit for this month. I don’t see it coming around any time soon. How that impacts prices is yet to be seen. If plants aren’t working they don’t need the metal, it’ll put a dip in anything for April/May delivery.”
Amy Hinton in London contributed to this report.