Suez Risk Comes at Bad Time for Unusually Tight Aluminum Market
(Bloomberg) -- The Suez Canal blockage is threatening to intensify a rare global shortage of aluminum products crucial to the transportation and construction industries.
As factory output surges from Europe to the U.S. and industrial buyers restock ahead of an easing in lockdown restrictions, supplies of specialty products like aluminum billet are tightening quickly. That’s helped push benchmark aluminum prices near the highest since mid-2018.
Several Middle Eastern suppliers including Emirates Global Aluminium and Aluminium Bahrain BSC provide semi-fabricated products that can’t quickly be sourced elsewhere. While there are no confirmed aluminum hold-ups in the Suez queue, flows to Europe and the U.S. would be at risk if the blockage drags on. Dislodging the stranded Ever Given may take until at least a week.
Short-term freight disruptions typically aren’t an issue in the well-supplied aluminum market, but the scramble for aluminum products in Europe has sent shipping premiums paid by consumers surging. Market observers say that the Suez crisis could worsen the situation.
“It’s a little bit of a frenzy,” Kamil Wlazly, a senior metals analyst at Wood Mackenzie, said by phone from London. “There are much more important things going on than the Suez canal blockage -- it’s just one more issue.”
As many as three vessels holding 25,000 to 75,000 metric tons destined for the U.S. are currently delayed by the blockage, which could boost the all-in price of specialty aluminum another 2%, according to researcher Harbor Aluminum. It could also boost the cost to ship the metal to near all-time highs, Harbor says.
“Under normal circumstances, the delay of a week or two of 75,000 tons would not have been a big thing to talk about, but in today’s context where all shipments are late coming off shore it adds to the bullish psychology,” Jorge Vazquez, Harbor’s managing director, said in a phone interview. “The market is already suffering from shipment delays because of the container crisis. This definitely doesn’t help.”
Billet buyers in the U.S. are facing a similar shortage. Aluminum companies in North America turned too pessimistic last year during the height of pandemic lockdowns. Metal-makers like Alcoa said they cut back on value-added products and boosted raw aluminum output underestimating the pace of recovery. Billet is used in a range of goods including window frames and recreational vehicles.
In top consumer China, government emissions regulations targeting key producers have drastically altered assumptions about supply. Aluminum in Shanghai rallied to the highest level in almost a decade earlier this month, with China’s production cuts considered a “game changer” for the long-term outlook after years of gluts in the industry. Prices had eased this week after the nation was said to consider selling about 500,000 tons from state reserves to cool the market.
To be sure, some traders see shipping problems as causing short-term delays that can be handled by drawing down inventories. Customers are already waiting three weeks longer than usual to get metal due to the ongoing shortage in shipping containers, traders estimate. Still, if the ship isn’t moved as quickly as experts expect, things could get dicey.
“Inventories that are getting down to like six weeks of supply, and historically any time you start getting down to six weeks or 45-50 days inventory, people start to get really nervous because the supply chain doesn’t work as well in a very narrow timeframe,” Greg Wittbecker, an analyst at CRU Group who had a decades long career at Alcoa, said in a phone interview about U.S. specialty supplies. “People are starting to say, ‘Well I could run out of metal.”’
Aluminum rose 2.3% to settle at $2,298 a ton at 5:51 p.m. on the London Metal Exchange, while Shanghai futures closed 2.1% higher. In other LME metals, copper climbed 2.1% and zinc rose 2.1%, both trimming weekly losses.
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