Viewpoint: Aluminium in overdrive into 2021

The European aluminium market has continued to heat up in December, rendering the positive outlook given by the industry a month ago somewhat undercooked, and meaning that prices and premiums will very likely be strongly supported through much of the first half of 2021.

The London Metal Exchange (LME) three-month aluminium price peaked at around $2,060/t earlier this month and has stayed at above $2,000/t. This compares to prices of around $1,800/t a year ago, which subsequently fell in the first quarter of this year even before Covid-19 struck international markets.

But that drop-off is not going to happen in 2021. Suppliers have done so much business for the first and second quarters that the market is certain to remain tight in the new year.

"It's been very good for the first quarter. A lot of smelters are sold out and some have even sold out for the full year," an analyst said.

Chinese demand has been the primary driver, as has been the case with many metals markets in recent months, with China's appetite for imports pushing world markets higher. But in aluminium this is especially unusual, as China is almost always a net exporter, last turning net importer in 2009 during the fallout from the global financial crisis.

But China's imports this year surpassed the 2009 total by October. Its net intake of primary aluminium and alloys reached 1.74mn t in the first 10 months of the year, compared with 1.43mn t in the whole of 2009.

"China is importing a lot of aluminium and it's not just primary ingot. They're in for everything," a second analyst said. "There is a lot of demand for value-added products and that is indicative of strong physical demand."

High industrial activity in China is a result of aggressive stimulus policies from the government as it looks to kick-start the economy following lockdown restrictions earlier this year. Those imports have affected the shipping industry, leading to rising costs on falling container space availability.

"There has been a lot of money pouring in from the government, and the policy of moving away from heavy industries has been put on hold," the first analyst said. "It's fiscal stimulus to the point of ensuring employment."

In addition, strong orders from European consumers indicate a recovery in aluminium demand there, which is adding to the pressure from Chinese consumers. The assumption that pent-up demand from Covid lockdowns will be unleashed in the first half of next year is only going to push prices higher as manufacturers gear up in the new year.

More automotive plants are reopening in European and US markets, as well as in Japan, and this is reflected in high reported orders of aluminium slab for the first quarter, and in strength in packaging industries.

"The tightness has pushed LME prices near to $2,100/t. It's unheard of for this time of year," the first analyst said. "Auto producers have ordered a lot of slab for the first quarter and are looking for more. The first six months of next year could be very strong."

Precarious position

But when asked to describe the situation in a word, many market participants might well pick "precarious". Chinese stimulus spending will wane at some point, and when it does China will likely resume its role as a net exporter of aluminium.

Outside China, demand may have recovered going into the first quarter, but is not entirely back where it was. Expectations are for a 10-15pc drop from pre-Covid demand next year, while metal producers have not halted operations.

And automotive sales have begun to slip. Analyst reports in Germany show expectations of a fall in new registrations in early 2021, and not by insignificant amounts.

"Things are good for the time being, but there is concern over the medium term," the second analyst said. "We should expect upward pressure on prices and premiums to continue because of container shortages and higher shipping costs. But once China stops funding so much activity, things could fall back."

By Jethro Wookey