LME aluminium, nickel, zinc prices expected to stay strong with tight supply an ongoing issue: Sucden

Most prices on the London Metal Exchange can expect more upside this year amidst a range of tailwinds, with aluminium, zinc and nickel particularly poised for further peaks given metal-specific dynamics, analysts at Sucden Financial told Fastmarkets.

“Aluminium is one of the metals certainly in the near term that we still see upside to. The power rationing and the reduced capacity in China has clearly tightened the market. Now we add the geopolitical tensions of Russia [to the equation],” Geordie Wilkes, head of research at Sucden, said.

The LME benchmark three-month aluminium price hit a high of $3,049 per tonne on Tuesday January 18, the highest price since October 2021. This is up by 53.7% from the opening price of $1,983.50 per tonne on 18 January 2021.

High power costs in Europe have also led to several smelter cuts at the start of 2022, pushing physical market premiums higher in Europe.

Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam at $430-460 per tonne on Tuesday, up by 192% from $150-155 per tonne a year earlier.

“The new capacity that we are seeing remains focused in China and as we saw last year the concentration of production in China does leave the rest of the world pretty vulnerable to these swings,” Wilkes said.

“I think the structural shift in aluminium capacity due to the decarbonization strategy will continue to create this tight market,” he added.

While exports from China, where demand is lower compared to other regions, could help alleviate the tightness, if the constrained situation remains, this could continue to push aluminium prices higher, according to industrial commodities trader Robert Montefusco.

“I think we can easily get back up to where we were $3,150 per tonne or even $3,200 per tonne,” Montefusco said.

Aluminium stocks on the LME have been falling significantly, and this has also made a dent in availability.

“We’ve lost all that stock that we had out in the Far East, the massive mountain we had in Vietnam – that’s gone,” Montefusco added.

Total LME aluminium stocks now sit at just 878,750 tonnes, of which over 400,000 tonnes is cancelled and waiting for delivery out. By comparison on January 19 2021, there were over 1.4 million tonnes of aluminium in LME warehouses.

“Outside of China, the banks keep telling us there is going to be big deficits in stocks particularly with all these power plays and if these power prices keep surging, we could be losing a lot of production,” Montefusco said.

Physical premiums across the aluminium supply chain in Europe also remain firm with value-added product demand strong from end-user areas.

“There is still demand in cans and in cars and in all sorts of sectors, so going forward I think we will be relatively strong going into second half of the year… and we can’t rule out going higher,” Montefusco concluded.

Energy issue also fueling higher zinc prices
Zinc smelters in Europe have also found themselves in a sensitive situation given high energy costs, with major producers such as Glencore and Trafigura cutting production and premiums in the region now close to record highs.

The three-month LME zinc price reached a decade-high of $3,944 per tonne in October 2021, when the first announcements over power cuts were made, and was last seen at $3,604 per tonne, its highest since then.

“It’s quite well documented now, but I think what we’re looking at is chronic, real tightness in Europe in the zinc market. You can look at physical premiums in Europe and the United States, and they’re certainly very high,” Wilkes said.

“The geopolitics situation with Russia and the low exports from them into Europe in terms of natural gas is certainly a risk to the upside for zinc at the moment,” he added.

Fastmarkets assessed the zinc SHG min 99.995% ingot premium, dp fca Rotterdam, at $320-360 per tonne on Tuesday, just shy of the historic high of $310-370 per tonne from December 2005.

The zinc SHG min 99.995% ingot premium, ddp Midwest US, meanwhile, is at its highest since Fastmarkets started covering the market in October 1995, at 18-23 cents per lb.

While impact is yet to be felt on the demand of zinc from the galvanizing industry and a downside risk to the metal’s price remains in the shape of the property market in China, Sucden expects prices to stay well supported in the immediate term.

“If you’re looking at the forward curve, [it] does show that the tightness should start to dissipate as we move through the second quarter and into the second half of the year,” WIlkes said.

Continued supply tightness, strong demand expected for nickel
The three-month LME nickel price touched $23,145 per tonne on Wednesday, its highest price since 2011 and rising by 11% since the start of 2022.

This price surge has come in parallel to the rapid drawdown of nickel stocks from LME and Shanghai Futures Exchange warehouses while the market experiences strong demand, resulting in the cash-to-three-month spread reaching a $473-per-tonne backwardation, its highest since 2007, on Tuesday.

“We expect the market to remain tight,” Wilkes said.

Current LME warehouse stocks data shows there were 47,502 tonnes of zinc available globally, and nickel stocks were at their lowest levels since December 2019 and 75% lower than the 185,922 tonnes available on January 19 2021.

Wilkes noted that nickel was experiencing strong demand from both traditional demand drivers such as the stainless steel market as well as new markets such as batteries.

“Stainless remains the key demand driver for nickel; we do see an increase in stainless production, especially in 300 series [stainless steel] which is the higher nickel content material,” Wilkes noted.

He added that the market expects 3.5 million tonnes of new stainless capacity in 2022, noting that 300 series production had increased by 10% year on year in 2021, to 16 million tonnes.

“When we factor in batteries – this market is going to grow across the board,” Wilkes said.

This is a consensus held by others in the market, with Russian miner Nornickel forecasting that batteries could represent up to 600,000 tonnes of nickel demand by 2025.

Much of the demand for nickel has been coming from China, where market participants have looked to secure material following an opening of the arbitrage window on January 11.

“We’ve seen hundreds of inquiries from [Chinese consumers] hoovering up as much material as possible,” Montefusco noted, adding that Sucden were now almost sold out of material on their books.

“All signals are bullish currently,” Montefusco added.

[Editor’s note: This article has been updated to amend the name of Sucden’s head of research, which erroneously appeared as George Wilkes when this story was initially published. This should have been Geordie Wilkes.]