The collapse in aluminium prices, which started well before the spread of the coronavirus but amplified by the continuation of these latest events, has had a strong impact on demand. On the contrary, it doesn’t seem to have influenced in any way the output side of the market, where production continues non-stop, creating a potential oversupply.
Analyzing the warehouses monitored by Lme it is possible to observe that from March 18 (967,325 tons) to April 2 (1,210,475 tons) stocks increased by about 25%.
LME ALUMINIUM STOCKS
The term structure between the 3-months’ quotations in $ and the cash $ also saw a marked increase in the differential in contango, rising to $35 (April 2) from $8.5 at the beginning of March. It should be noted that an increase in contango suggests a weakening of demand and a widening of supply.
SPREAD ALUMINIUM 3M $ – ALUMINIUM CASH $
China, which is the main producer and consumer of this metal, in 2019 produced about 35.8 million tons of aluminum ton in a total of 63.7 million with a share of 44% and increased production in February 2020 by +3.7% compared to the same period of the previous year (Source: International Aluminum Institute).
CHINA PRODUCTION FEB2020-FEB2019
So how is it possible that at these prices, well below the break even point of the main producers, is it still profitable to produce?
Likely the fall in costs (input) made it possible to sustain the foundries’ risky margins, thanks in part to the fall in energy markets (WTI -70% since the beginning of January 2020 when it was worth around $65).
WTI – 2020 MAY CONTRACT
ALUMINIUM 3 MONTH $
The 3-month chart in $ shows that prices are close to the 2016 lows in the $1430 area. This level was also reached by other non-ferrous metals, such as copper and tin, favoring a subsequent phase of reaction. It is therefore not excluded, in case of returns to this support, a potential recovery of prices. Keep the situation monitored because we are in a particular market situation.
|Selling Area 2||1700||1500|
|Selling Area 1||1600||1450|
|Buying Area 1||1430||1300|
|Buying Area 2||1300||1250|