LME Week: Al market braces for the unknown

London Metal Exchange (LME) Week may not host the same level of breakneck-speed deal making that characterised the annual gathering of metal industry professionals in decades past, but at times of economic turmoil it provides a haven for investors sharing the possibly forlorn hope of finding a panacea to the overriding uncertainty affecting global markets.

And there is plenty of turmoil in aluminium markets as this year's event gets under way. LME prices have been extremely volatile through October, driven upwards by sky-high energy prices and an historically strong dollar, while falling back on demand fears owing to continuing Covid lockdowns in China and rising stocks. Official three-month prices have fallen to lows below $2,170/t and surged to highs above $2,360/t this month.

The volatility is the result of a lack of clarity on key market drivers. There is uncertainty over what action governments might take to combat the growing energy crisis, with calls growing to address the issue that has already seen more than a third of European aluminium capacity slashed over the past year.

Similarly, the approach adopted by countries and corporations over the contentious issue of Russian metal remains uncertain. Russia's aluminium industry has so far been spared direct sanctions as a result of the invasion of Ukraine, but that could be changing soon as the US is considering tariffs on Russian metal, while the LME itself is deliberating a ban on Russian metal in its warehouses. That possibility saw a dump of aluminium into LME sheds last week, leading to another sharp price move.

Russia produces just under 4mn t/yr of aluminium. If Russian metal is no longer available to many buyers there will be significant effects on supply, not least in the essential sectors of slab and hi-purity aluminium, which serve the packaging and electric industries and of which Russian giant Rusal is a major provider.

And there is uncertainty over what consumer demand will look like in the new year. Many buyers are holding off on committing to long-term purchases while there is a possibility that the cost floor for aluminium production could fall sharply if the energy crisis eases. Aluminium premiums have fallen owing to weak demand, giving up almost a third in October so far. At the end of last month, Norwegian producer Norsk Hydro announced cuts to production at its Karmoy and Husnes smelters in Norway, in response to falling demand rather than the surging cost of energy.

Traders may hope for some form of resolution to all this uncertainty during the week's events, but it is beyond the industry's ability to provide it as the industry is not determining its own future. It is government action that will define the future for aluminium and other base metals. Any relief on energy costs will swiftly translate to lower prices and premiums, while any further sanctions on industry will see the reverse effect. Those sanctions could be on Russia or elsewhere, such as when the US placed new restrictions on China's semiconductor sector earlier this month as it seeks to block China's access to advanced materials.

The danger for producers is that conditions deteriorate further, demand continues to weaken, and profits fall at a time of huge costs owing to the energy crisis, plunging many into inevitable closures. Delegates at the LME Week seminar in London this morning heard forecasts for LME aluminium prices in 2023 of as low as $1,750/t.

For consumers, the lack of dealing for the first quarter of next year presents a different danger, one that the market has faced before — end-user markets strengthen and consumers all come to market early in the year and find limited supply available, resulting in premiums rocketing to record highs.

Either scenario would be far more easily absorbed by the industry if there were some certainty available as to what markets are likely to do. But there is no such certainty this year.

Jethro Wookey