The international aluminum price has not taken the usual path. Since reaching a price high of 3,975 USD in March, it has been falling all the way. Yet, oddly enough, global aluminium supplies are continuing to tighten and prices should have been supported. But the reality is that, like most metals markets, demand destruction dominates the market logic and prices are powerless to turn around.
1. Costs have risen sharply
Europe is in the midst of an unprecedented energy crisis, with gas supply worries intensifying and electricity prices soaring. The trend of passing natural gas prices in Europe to rising electricity costs will continue, which will undoubtedly be a huge blow to the metal smelting industry, which is very dependent on electricity. It is reported that some aluminium smelters and alumina refineries have been partially or fully closed due to rising electricity prices, making the supply of architectural & industrial aluminum profiles and aluminium-related products fraught with risk.
Not only Europe, but the United States is also suffering from high electricity prices. Last week, Alcoa warned that soaring global costs would render as much as 20% of its aluminum capacity unprofitable, and expects to see a strong recovery in prices only in 2023. In addition to electricity prices, China's related production capacity is still unstable due to the impact of the epidemic, and the international shunning attitude towards Russian aluminum products manufacturer is exacerbating the problem of tight supply.
2. The demand side is destroyed
Cost is only one of the reasons for the fall in aluminum prices. The other two come from the high exchange rate dollar and Chinese demand. China is the largest consumer of aluminum. Due to the epidemic, downstream industries of aluminum products have been cautious, which has also led to the continued sluggish demand for aluminum products, which also provides a catalyst for demand destruction. To make matters worse, the world has entered a period of rising interest rates, which has also driven the dollar to continue to strengthen. The high exchange rate USD usually has a certain negative correlation with commodity prices.
In addition, the increase in interest rates has also weakened the profits of the aluminum trade. In the metals market, many traders buy metals in the form of borrowing, and rising interest rates increase the debt burden. This is undoubtedly a signal to stop the entry for risk-averse people.
The weakness of the macro environment has caused aluminum companies to stop production to protect themselves. Alcoa announced last month that it would close its second-largest smelting plant in the United States; Alcoa announced it would cut some production lines, resulting in a loss of $20 million.
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