Zorba market in flux on China fears

The global zorba market has stalled as most Chinese end users suspend aluminum scrap consumption amid growing fears that the country's import quotas for the fourth quarter will be severely reduced and uncertainty over the government's final import policy.

Multiple market participants surveyed by Argus reported that fourth quarter aluminum scrap quotas may fall by as much as 80pc from the previous quarter when China issued a 372,476t quota, down by nearly 21pc from the average third quarter import volumes between 2016-2018.

So far for the fourth quarter, the Chinese government has only issued one batch of import quotas on 23 September for 32,940t of aluminum scrap, representing roughly 9pc of last quarter's quotas.

More batches of scrap quotas could be issued over the coming months, as the Chinese government issued three separate rounds for the third quarter, though sources familiar with the matter are skeptical.

Still, expectations that aluminum scrap quotas will be down significantly, paired with uncertainty regarding the nation's reclassification campaign for aluminum scrap, has prompted most major Chinese aluminum consumers to step temporarily to the sidelines or scale back purchasing volumes.

US and Canadian market participants told Argus that major zorba buyers across China have suspended purchases and canceled earlier orders.

Some suppliers with material already on the water were forced to flip the containers in neighboring countries at a discount.

At the moment, most suppliers and brokers expect that only limited tonnages can be shipped to the country, emphasizing that the largest challenge facing them over the remainder of the year is the potential outlets more so than low prices.

The exodus of Chinese buyers has left suppliers in a bind as they struggle to find an outlet for material due to anemic demand in India and an oversupplied market in the US.

This sudden shift in the market has skewed the typical hierarchy of global zorba prices.

The premium that non-US exporters of zorba were once being paid by Chinese buyers has thinned significantly.

The spread between US west coast sales prices for 99/3 zorba and cif China zorba prices, regardless of origin, was as great as 6.5¢/lb in the first week of October 2018, as retaliatory Chinese tariffs on imports of US aluminum scrap caused buyers to deduct the tariffs up front.

But as Chinese buyers' appetites dwindled so too has the premium that was established between US and non-US zorba material. The spread between US cif sales and non-US origin sales was 2.5¢/lb as of 11 October.

Retreating Chinese demand and limited outlets in other key consuming markets is expected to further whittle down the premium Chinese buyers were once willing to pay for non-US origin material.

Much of the scrap that had been making its way to China from the US is now being routed to Europe, spiking scrap availability in that market and pushing prices down sharply.

As Chinese's buyers face an unknown future for scrap import many are already reportedly looking to shifting from consuming aluminum scrap to aluminum alloy ingots, which could further shift the pricing dynamics for zorba and aluminum scrap in the coming months.