New paradigm seen for global aluminum industry amid China output curb: panelists

With China taking steps to cap its primary aluminum output at 45 million mt/year, the global aluminum market is becoming increasingly different, with a greater focus on environmental and power supply concerns taking center stage in 2022, panelists said Jan. 31.

For the past 20 years, China "relentlessly" expanded its production of primary aluminum, putting the global market in an oversupplied environment and pressuring prices, Matt Aboud, senior vice president of strategy and business development for Century Aluminum, said during a discussion at the S&P Global Platts Aluminum Symposium in Phoenix.

While many in the industry were skeptical when China announced plans to cap its production, it seems to be living up to its commitment, Aboud said. "We're starting to believe more and more that this is going to hold," Aboud said.

For aluminum, this is really a paradigm shift, Oliver Nugent, commodities strategist for Citi, said, noting that China accounted for 90% of all supply growth in aluminum production over the past decade.

"If the market got tight historically, China would just add more smelters...We think this is a structurally different situation," Nugent said.

China sticking to its capacity cap is going to revert the LME value back to Western world replacement costs, meaning the global market will have to pay closer attention to the fundamentals of the Western world, Aboud said.

With current LME pricing, there has been several new capacity announcements outside of China as well as announced restarts, however in the short term, the market is seeing capacity come offline in Europe due to extremely high energy costs, he said.

Looking at the medium term, Citi has a bullish view on primary aluminum prices, Nugent said.

China being more disciplined with its capacity, production coming offline in Europe in the short term, high prices for power, and high logistics costs all support a bullish outlook for primary aluminum prices, in addition to a solid demand outlook, panelists said.

Russia-Ukraine tensions add uncertainty

Tensions between Russia and Ukraine are also an area of growing concern that could impact aluminum prices going forward, panelists said.

"What we've seen in the last few trading sessions is people looking for coverage in the aluminum space should tensions escalate between Russia and Ukraine," Nugent said.

There are concerns around the risk of sanctions being deployed, although there is debate as to if this is feasible a second time around, he said. With aluminum being an energy-intensive commodity, Europe receiving less natural gas from Russia seems to be the biggest risk currently.

"Thinking of aluminum really as a derivative of gas trade, that is where the most extreme risk lies," Nugent said. "When it comes to the options space, we are seeing quite a pickup in volatility that is being priced into the options on the upside."

Industry monitoring trade, changing regulations

Looking at the US legislative and political front, Lauren Wilk, vice president of government affairs for Arconic, said the big picture consensus is that uncertainty, volatility and disruption are the new normal. Everything from supply chain and labor shortages to inflation concerns and the political push to decouple industries from China is going to have an impact, she said.

"[The Biden administration] and Congress are really rethinking competition, industrial policy and those big policy goals in driving companies to take action on things like environmental, social and equity principles," Wilk said.

On the trade front, bilateral negotiations are expected to continue with countries to find alternative agreements to the US Section 232 duties, however once a tariff program is in place, it is difficult to dismantle, she said.

In October the US reached an agreement with the EU to replace the existing 10% import tariff on aluminum with a tariff-rate quota beginning Jan. 1, however, Wilk said it remains to be seen if other countries can fit within the confines of this type of agreement.

"I think its really clear the offer to the EU is the best deal anyone is going to get," she said. "But the EU had a really effective retaliatory tariff program in place that brought the US to the table to have that conversation. That is a fairly unique feature not many other countries have and...I would expect fairly limited future exemptions."