The Unwavering Aluminium Prices Vs. The Rock-Bottom Inventory Levels
How familiar are you with the Chinese town of Baise? As insignificant as it may be, Baise sent shockwaves across the world when it suddenly went into lockdown.
Why? Because its nickname is the “Aluminium Capital of Southern China”.
That’s right, when Baise shut down, the hindered logistics flows initially sparked fears about supply in China, which later spread like wildfire across the world.
Unlike other metals, aluminium is one of those resources that have the potential to be severely affected by energy prices, as almost half the price of the metal itself comes from the energy costs needed to produce it.
It seems that the industry has a lower growth projection for 2022 due to the inflated base of 2021. But Baise’s lockdown is not the sole factor that has led to this inventory deficit. Some of the other major catalysts include:
- China’s Lunar New Year holidays had already exacerbated the aluminium shortage.
- The recent hike by the Fed.
- The ongoing chip shortage has led to disruption in the auto and consumer industries.
- The Russia-Ukraine war could spark a major gas shortage in Europe, which in turn would affect aluminium production.
Despite the inflated prices, the fact remains that the market is in deficit, with further diminishing LME inventories. LME inventories have dipped 60% to 260,000 tonnes when compared to the start of the year. The inventory level is recorded to be at its lowest in 17 years, where LME prices have been more or less the same for this period.
As of April, China’s aluminium output had hit a record 3.6 tonnes. Smelters functioning at their full capacity revamped production, which had been hampered due to power rationing. Domestic demand is still in shackles because of the strict lockdowns imposed across the country. This will keep the increased output in check.
The Chinese government’s fixation on a low-carbon future paints an optimistic output scenario for growth and the revival of restricted capacity can help enhance this output. However, the higher costs of smelting have compelled them to narrow the smelting margins, which could possibly be a risk. This could also lead to a situation wherein China will have to consume the surplus produced.
The Central Banks’ hawkish stance to curb inflation will impact the growth of the economy, which in turn could hurt aluminium output. Moreover, uncertainties revolving around the recession pose a threat to industrial metals as well. The reduction in prices is meant to be corrected after its rally earlier this year. The trimmed growth as a result of increased growth coupled with demand will eventually balance things out. If things go as planned, the prices will eventually drop.
The nosedive in inventory levels does not snatch away the anticipated earnings for domestic players like Vedanta and Hindalco. The depreciating INR against the USD also gives them a bubble edge. The dynamics of expectations in the current scenario have paved the way for price correction and high energy costs—the scarce coal costs must be taken into consideration as well.
All in all, factors like the Fed hikes, China’s policies and the current geopolitical situation are likely to dictate aluminium prices and valuations for the short-term scenario at least.
Manvendra Pratap Singh is the Founder and CEO of Trinkerr. He is an IIT Kanpur-IIM Lucknow alumnus and an investor with 15+ years of experience.