Aluminum breaks higher on supply constraints

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Through Wenyu Yao

Industrial metals have mostly entered the new year on solid footing, although trade in the first days of 2022 has been somewhat mixed. Nickel fell more than 2% as supply-constrained metals continue to expand their gains, with aluminum outperforming the complex as soaring electricity prices threaten supply and fundamental positivity boosts momentum.

The light metal jumped more than 3% on Wednesday (January 5) in the London session, with 3M contract hitting an intraday high, at $ 2,938 / tonne – a two-month high, before hawkish minutes of the Fed do not bring down the whole complex. Thursday.

In the meantime, there have been heavy cancellations of LME warrants for three consecutive days, mainly from the warehouse of LME Malaysia, which could potentially lead to large outflows, sparking optimism about the high spot demand. Inventories should have started to accumulate in the Chinese onshore market according to seasonal patterns. But instead, these continued to decline this week to reach around 790 kt on Thursday, well below the five-year average. This helps allay concerns about a seasonal lull in demand.

As we move into 2022, European generators are still plagued by high electricity costs and there appear to be no signs of a quick fix to the problem. Base electricity prices rose not only at the start of the curve, but also in long-term contracts. We have seen several producers in the region announce activity reductions at the end of 2021, and the risk of supply growth is still on the downside. We forecast a deficit for the aluminum market in 2022 (Outlook 2022: aluminum will sink into a deeper deficit). With low gas storage and high volatility in the gas market, many uncertainties surround the European electricity market. It would be difficult for smelters to secure a competitive electricity deal in this market.

In Asia, however, Indonesia’s latest coal embargo rocked regional energy markets earlier this year, risking supplies to its major buyers, including China, India and Japan. The situation has remained fluid there as consumers like Japan have called for the ban to be lifted, and domestic coal miners are request exemptions. Indonesian authorities are reported to have held a meeting to review the ban following the refoulement on Wednesday, but there has been no confirmation at the time of writing. During 4Q21, India managed to avoid a significant impact on aluminum production despite dropping coal stocks to critical levels, as their industry association called for increased coal imports. As for China, the worst impacts of the electricity crisis in the fourth quarter are now in the mirror thanks to the strong intervention of the authorities to stimulate the national production of coal. Meanwhile, the demand for electricity in winter has so far remained within a reasonable range. Still, the Indonesian embargo could have little impact on China in the short term, as national power plants have large stocks of coal to supply electricity. However, an extended embargo by Indonesia would risk shipping coal shipments to India and delaying the restart of aluminum in China.

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