INTERVIEW: Jean Marchand on events that transformed the aluminium market

Aluminium industry veteran Jean Marchand has witnessed major game changers in his career, from the launch of the London Metal Exchange contract, the collapse of the former USSR, premium volatility and financing games, to the change in the market structure and consolidation.

Aluminium industry veteran Jean Marchand has witnessed major game changers in his career, from the launch of the London Metal Exchange contract, the collapse of the former USSR, premium volatility and financing games, to the change in the market structure and consolidation.

“If anyone tells me aluminium is a boring industry, I would love to debate that point with them,” Marchand, who recently retired from Rio Tinto as director of global remelt ingot management, sales and marketing aluminium, said.

Marchand, who was recruited from university by Alcan (later acquired by Rio Tinto), stayed with the company for almost 35 years. He talked to Metal Bulletin Asia editor Shivani Singh about the key developments that he witnessed in the global aluminium industry from his home in Montreal, Canada.

Fall of the former Soviet Union
The “cash and carry” programmes in recent years, the huge inventory overhang and need for transparency seem like a story of the past decade. However this was seen much earlier when Marchand was starting out in this industry in the early 1990s, he said.

“The implosion of the former Soviet Union in 1991-1992 was a game changer as there was a tsunami of metal that overtook the western world,” he said, adding that the traders were the big winners during this time.

“The LME exceptionally modified its rules to allow storage outside, because normally LME storage has to be under a roof and it seemed the world was going to hell in a handbasket at that time.”

He added that light metal stored in LME warehouses and off-warrant inventories surged at this time as some market participants engaged in storage activities to secure primary metal supply and profit from the steep contangoes prevailing during this time of record surplus.

“LME stocks touched lifetime high of 2.5 million tonnes in early 1990s,” Marchand said. This level was eclipsed in recent years when LME aluminium stocks hit over 5 million tonnes.

“Traders went into the former Soviet Union and bought metal directly from smelters who were in dire need of liquidity and that had a very big impact on the market,” he said. The geopolitical changes in the former USSR worked to the advantage of many merchants, who at that time had been facing more difficult times as the market was becoming more transparent and hence more efficient.

Many of these traders who wanted to remain viable went into the former Soviet Union and secured metals that were exotic shapes and offgrade.

“I am not saying this in a negative way because everyone benefitted; the merchants were able to secure metal units that were offgrade or odd shapes, which they were able to bring to the west and offer to consumers and [VAP] producers at discounted prices.”

Comparing this to the large production hub that is China today, Marchand said that export duties on primary aluminium obstruct exports from there.

He warns that unless the Chinese situation changes, aluminium prices are condemned to current low levels. China needs to cut primary aluminium production or increase its domestic demand, he said.

“If they keep the same production levels as they have now and domestic aluminium demand doesn’t increase, well then the metal will just come out of China in different forms – semi-fabricated or final aluminium products, which will just cannibalise demand in rest of the world,” Marchand said.

“There are many ways around metal being economically exported from a Chinese point of view, sometimes they are exporting semi-fab products which have no export tax and have VAT rebates attached to them,” he added.

However, the concerns of Chinese primary aluminium flooding the global markets are not immense, he said. “Yes, China is a massive source of production, but right now I don’t see China imploding as the former Soviet Union did.”

GFC, financing deals and premiums
The Great Financial Crisis of 2007-08 had a huge impact effect on the aluminium industry, as the resulting low interest environment, large contangoes, warehouse load-out rates and continuing aluminium production at a time when aluminium prices had nosedived all contributed to record LME and non-warranted stocks.

This led to the financing of metal stocks, earning money on the forward spreads and the build-up of huge queues to take out metal from warehouses which exacerbated this situation. The load-in, load-out rules that the LME pushed out recently have helped to resolve this issue.

LME stocks hit lifetime record highs of 5.4 million tonnes in the mid-2014. The day the Lehman Brothers filed for bankruptcy in 2008, LME aluminium stocks were at 1.2 million tonnes.

“The stocks reported in the LME warehouses have shrunk quite a bit but there is still a lot of off-warrant stocks”, with global opaque stocks anywhere between 8-10 million tonnes.

“This combination of all these elements – low interest rates, contangoes, the LME warehousing rules – had the impact that it did on premiums,” Marchand, who joined the LME’s aluminium committee in 2003, said.

“If someone would have told me ten years ago, even five years ago that we would have a Midwest premium upwards of 24 cents [per lb], I would have dismissed the person as someone who did not know much about the industry.”

“I think I am glad I was there when it happened because it made life exciting, it was something that one would not have thought possible or even plausible.”

The US Midwest premium hit a record high of $0.24125 per lb in early 2015 and fell drastically to $0.0775 per lb by September.

The Chicago Mercantile Exchange (CME) has launched four aluminium premium contracts, taking its business from over-the-counter to exchange.

“I think that with this great volatility in premiums that we have seen, that has really incited people to use that contract and it seems to be fairly successful,” Marchand said of the CME’s AUP contract that tracks the US Midwest premium.

“The North American premium contracts and the two European contracts have shown success and the market is somewhat surprised and pleasantly surprised.”

As for the North American market, he expects this region to compete for the light metal.

“North America is getting shorter and shorter metals units with increasing demand and decreasing North American production, so I think North America is going to be a magnet seeking to attract metal units,” Marchand said.

Launch of LME aluminium contract
The LME launched the aluminium contract in 1978, and it took over a decade for aluminium producers to adopt it.

“For the first ten to twelve years, primary aluminium producers basically ignored the existence of this contract,” Marchand said. “If you were working at a primary aluminium producer at that time, it was basically frowned upon if the commercial manager spent time studying or discussing the aluminium contract.”

“The producers were in denial,” he added.

The aluminium producers saw this contract as a risk to losing control over pricing their product initially.

“I would say the primary aluminium producers to a large extent didn’t understand the contract at the beginning to the advantage of the merchants and physical traders who did embrace this new market.”

In the initial days, people took “baby steps”; they experimented by holding a 40 lot short position and making a physical delivery against it or by holding a 40 lot long position and taking physical delivery against it.

Marchand emphasises how impressive it is how market knowledge and structure has changed since then.

Composition of the market
“I remember in late 80s and early 90s the main source of liquidity were commercial players,” he noted.

“At that time, if you bought or sold 5,000 tonnes to a merchant you could literally observe the price movement on the screen,” he added.

But in today’s world, such a trade and offset hedge would be a blip on the screen, Marchand said.

“Now 5,000 tonnes or 10,000 tonnes [traded] will barely affect the screens,” he said, adding that the financial sector – including investment banks, high frequency traders, hedge funds – are the main source of liquidity today.

The financial players and not market fundamentals are the main drivers of price volatility on a daily basis, he said. “But market fundamentals set the overall price trend,” he added.

Marchand’s market outlook
Problems such as overcapacity and supply discipline suggest that prices will remain near present levels, according to Marchand.

For the next twelve to 18 months, Marchand expects aluminium prices on the LME to trade at $1,450-$1,600 per tonne.

The issues with premium volatility have been fixed for now. “The LME price and the all-in price are back in a normal relationship now,” he said.

In the longer-term, the Asian benchmark premium could change from Japan, which imports 2 million tpy of primary metal, to a Southeast Asian premium.

“I am not saying this is going to happen in the immediate future, but it’s not impossible,” he said.

“[Compared with] the demographics of Japan’s shrinking population, more and more offshoring of industries from Japan and with consumption in Japan not growing” there is a probability that buyers will shift to other regions of Asia for premiums which are more in tune with their own growing consumption.

Marchand believes there is still a lot of primary aluminium production that could be shut, sold or merged into other production entities.

“If you look at companies like Alumax, Reynolds, they are all Alcoa; while Alusuisse, Pechiney and Alcan are Rio Tinto and the former VAW is part of Hydro Aluminium; Sural and Rusal are one,” he said.

“Despite the enormous consolidation that has taken place in the primary aluminium sector, it is still a global industry. However, 15-20 years ago it was truly global because you had many independent companies all over the world.”

An illustrious career
Jean Marchand was born and brought up in Montreal, Quebec in Canada. He joined Alcan through Montreal’s Concordia University campus placement in 1981 as an accounting analyst.

He was rapidly promoted to the audit department and assigned to operational audits.

In 1988, following an operational audit of the metal trading department, he was offered a position in the commercial team with responsibility for the procurement of alloying ingredients with involvement in physical trading.

Marchand progressively became responsible for the entire physical metal trading activity, and was promoted to director, metal trading & price risk management where he assumed oversight of all trading activities on the LME and other terminal markets in addition to physical trading.

After Alcan’s acquisitions of Alusuisse (October 2000) and Pechiney (fourth quarter, 2003), Marchand became responsible for the integration of all trading activities and hedging activities and was appointed director of global remelt ingot sales.

Following Rio Tinto’s acquisition of Alcan, Marchand was appointed director, global remelt ingot sales, marketing and price risk management at the Rio Tinto Aluminium product group.

He retired from Rio Tinto on December 31, 2015.

He is enjoying superannuation by skiing, sailing and his new passion, golfing.

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