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One such topic, recurring in recent months, is B. In particular, much has been said about the potential inability of the LME to reflect the true value of global aluminum prices. While this may be an oversimplified statement, it is essential to note that there is no single global aluminum price. On the contrary, every market in the world has primary aluminum prices.
That said, London Metal Exchange quotations largely influence these prices, adding premiums and discounts to account for local costs, taxes, and supply and demand pressures.
The main concern that keeps buyers awake is the supply and demand position. In particular, the concern stems from the oversupply of Russian aluminum and the limited supply of non-Russian metal in the exchange. This situation could potentially lead to a glut of metal in the exchange from a source of supply that too few buyers are willing to use.
This, in turn, could cause the LME price to trade at a discount to its true value. This is mainly due to competition among traders to win parcels from non-Russian brands. However, the shortage of non-Russian metal has far-reaching consequences beyond the exchange itself.
At the end of June, Russian brands accounted for about 80 percent of aluminum stocks secured on the LME. Moreover, the situation has likely worsened since then. Asian warehouses store a significant portion of this metal, as China has been the largest consumer of Russian metal, both directly and from the LME. However, China’s appetite for Russian primary metal seems to be weakening (read more here).
Last year, trade between Russia and China was robust, with China exporting alumina to Russia and receiving primary bullion in return.
This exchange was beneficial to China, especially during the drought in Yunnan that reduced its smelting capacity. In fact, Chinese imports of Russian-branded primary aluminum increased from 291,000 metric tons in 2021 to 462,000 metric tons last year (read more here).
The pace of imports accelerated further in the first half of this year, with Russian metal imports soaring 177 percent year-on-year to 414,000 metric tons. At that time, Russian aluminum accounted for 85 percent of Chinese imports.
Aluminum – 3 month $/ton daily
However, thanks to increased water supply, China’s domestic production rebounded by three-quarters of a million tons year-on-year in the second quarter. This poses a serious risk that Chinese imports of Russian material will decline in the second half of the year. Meanwhile, Russia has continued to find customers for its primary metal. However, European aluminum producers are now expressing concern about the flooding of the market by Turkish semi-finished products backed by cheap Russian primary metal.
Indeed, the potential loss of a significant portion of Chinese demand could lead to an increase in Russian metal in the LME. This could lead to an almost exclusively Russian metal pool with limited buyers. This, in turn, could potentially undermine LME aluminum prices relative to what physical buyers would have to pay for non-Russian metal.
The LME could argue that there are mechanisms to address such distortions. Examples include the premium for physical delivery, which has always been a measure of regional versus global demand. However, this premium is not likely to reflect specific brands or origins. As we reported earlier, the LME has periodically reviewed and decided not to ban Russian metal deliveries.
One reason is concern about legal consequences, since Russian metal is not subject to sanctions. Should a discount emerge, the possibility could open up for a price discovery agency to launch a premium for non-Russian deliveries.
Both producers and consumers could use it to reflect the real cost of the metal to support their processing. Although we are not there yet, the possibility continues to cause concern among metal buyers. Therefore, perhaps it should be a more pressing issue for consideration.
