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Aluminum Market Caught Between Hope and a Wall of Metal

Aluminum Market Caught Between Hope and a Wall of Metal

(Bloomberg) -- Aluminum prices are collapsing and excess inventories are rising fast, but the market isn’t yet facing the crisis that ravaged the industry in 2008.

Of all base metals, aluminum looks set to be the worst affected by the coronavirus pandemic, as orders from car-makers grind to a halt and supply remains stuck at high levels.

More than half of smelters around the world are losing money as prices trade near four-year lows. However, so far curtailments have lagged behind the slump in demand, leading to a rapidly expanding surplus.

A similar dynamic upended the aluminum market in the last financial crisis, leading to a glut that took more than a decade to work off. The wall of metal also triggered a wave of so-called financing deals that became the most profitable trade in a generation for banks, traders and warehousing companies.

This time around, there is hope that major economies will emerge from government-imposed lockdowns before the surplus reaches such disastrous extremes.

“We’re not seeing a sense of panic,” Philippe Mueller, head of aluminum trading at Trafigura Group, said. “Trafigura is supporting its long-term suppliers by accepting some additional volumes in the short term.”

Aluminum Market Caught Between Hope and a Wall of Metal

Suppliers to car-makers have still been taking some deliveries, easing pressure on aluminum producers who might otherwise be looking to destock. Additionally, consumers in other sectors are starting to request more primary metal to make up for a sharp decline in scrap supply, Mueller said.

While several countries across Europe have been in lockdown for weeks, the full impact is only likely to start hitting the aluminum industry this month, due to a lag in shutting down plants supplying the automotive industry, according to consultancy Wood Mackenzie.

“You can see there is a scare in the market, but the question of whether it will be worse than 2008 is difficult to answer at this point,” Kamil Wlazly, a senior analyst at Wood Mackenzie, said in an interview. “It’s not pretty, I can tell you that.”

With inventories building throughout the supply chain, the market is showing early signs of stress. Spot prices are trading at the deepest discount to futures in more than 18 months on the London Metal Exchange, and several major producers have listed additional metal brands with the bourse in the past few weeks.

Aluminum Market Caught Between Hope and a Wall of Metal

The listings by Vedanta Ltd., Norsk Hydro ASA, Rio Tinto Alcan Inc. and Emirates Global Aluminum PJSC imply that smelters that have been focused on selling specialized products to end-consumers may instead switch to commodity-grade output that can be readily delivered to the LME.

A spike in LME inventories was a major catalyst in a collapse in prices during the last crisis, but it presented an opportunity for banks and trading houses including Goldman Sachs Group Inc. and Glencore Plc, as they tapped cheap credit lines to lock away millions of tons of metal in financing deals.

As demand later started to turn around, the saga culminated in consumers complaining to the U.S. Senate that the financing deals were creating an artificial shortage.

Due to warehouse reforms introduced by the LME, it’s unlikely that episode will be repeated, Mueller said. There are also fewer banks active in the sector, and the deals themselves don’t look as lucrative, given a narrower contango and constraints on dollar liquidity, he said.

Even so, producers are bracing for an increase in inventories as demand stalls. United Co. Rusal, the largest producer outside China, has seen customers delaying orders, and it doesn’t expect usage to start recovering until the second half of the year at the earliest.

As a result, smelters are increasingly retooling their production lines to make more readily saleable commodity-grade aluminum, and scaling back output of specialized products that were highly lucrative before the coronavirus hit.

“Producers are already switching away from value-added products,” Eoin Dinsmore, a research manager at CRU, said by phone. “Those decisions have already been made.”

©2020 Bloomberg L.P.