Base Metals Dashboard - Week Ending November 4, 2022

Aluminum

US aluminum producer Alcoa sent three letters to the LME in September and October requesting that Russian metal be banned from the exchange. The company also requested better clarity on how much metal of Russian origin is in LME warehouses. Alcoa feels that allowing large volumes of Russian metal into the LME system could exert undue influence on LME aluminum prices and might upset the global aluminum supply and demand balance. According to the letters, Alcoa believes that 250,000 mt of aluminum that was delivered to LME warehouses last month could be Russian. Moreover, they fear that 1,000,000 mt/yr of Russian aluminum could be delivered to the exchange. These letters are in response to the discussion paper the LME launched in late September outlining possible actions against Russian metals producers, including an outright ban on their metals. The deadline for responses was last Friday, October 28. (Source: Reuters)

Continuing with Russia, the country’s top aluminum producer, Rusal, has sold 76% of its primary aluminum production for 2023, with Glencore remaining a top buyer, according to anonymous sources cited by Reuters. Rusal expects to produce 4.2 million mt of primary in 2023. Terms for the 2023 contract haven’t been disclosed; however, in April 2020, Rusal signed a long-term sale agreement with Glencore for approximately 1.6 million mt per year between 2021 and 2024. According to the sources, only about 10% of Glencore’s customer base is shunning Rusal’s metal. Due to the Russia-Ukraine conflict, some market participants believed buyers would shun Rusal in 2023, especially if Rusal’s metal is banned from the LME.

As for other major producers, starting in mid-November, three aluminum smelters in China’s Henan province will curtail approximately 110,000 mt of combined annual capacity due to unprofitability and pollution controls, according to Bloomberg and Shanghai Metal Market.  AEGIS notes that this unprofitability likely stems from soaring electricity costs due to low hydropower supply across several key Chinese aluminum production regions. According to Shanghai Metal Market, production costs for Henan’s province smelters exceed 19,000 yuan/mt, or $2,618/mt. This compares to LME aluminum prices, which are $2,344.50/mt in the cash and $2,355/mt in the 3M (11/4/2022 settlements). Henan province has approximately 2 million mt of aluminum smelting annual capacity, representing nearly 5% of the country’s total. (Source: Bloomberg, Shanghai Metal Market)

AEGIS notes that these curtailments are the latest in a growing list of cutbacks by Chinese aluminum producers. In mid-September, Shanghai Metal Market reported that aluminum smelters in Yunnan province might cut production by 20 to 30%, or 1 to 1.5 million mt, far more than the 500,000 mt reduction requested by local authorities. We also note that Chinese aluminum production continues at a blistering pace, despite the recent curtailments.  Aluminum production averaged over 114,000 mt/day in September, a new record daily volume; however, total monthly production was 3.42 million mt last month, down slightly from the record 3.51 million mt in August, according to China’s National Bureau of Statistics.

Zinc

Due to supply-chain issues in Kazakhstan stemming from the Russia-Ukraine conflict, Glencore has cut its 2022 zinc production forecast by 65,000 to 945,000 mt. This expected drop in full-year production continues the trend seen so far this year. In the first three quarters of this year, the company produced 699,600 mt of zinc, down 18% from the same period in 2021. The drop in production so far this year was largely due to mine closures in Canada and South America, and also COVID-related worker absences in Australia. In 2021, Glencore produced 1.117 million mt of zinc, or nearly 8.5% of the world’s mine production. (Source: Reuters)

Steel

Argus's weekly US HRC assessment, which is now at $709.75/st, fell $26.50/st this week. This assessment has fallen nearly 8.5% since October 4, as the market contends with falling demand. Steel service centers believe demand will stay subdued into the final months of 2022, according to Argus reports. For example, appliance maker Whirlpool recently stated they cut output by 35% last quarter due to an expected cutback in consumer demand into 2023.

As for supply, steelmakers keep increasing output. Last week, AEGIS commented that Cleveland Cliffs will increase production by 300,000 to 400,000 st in 4Q, even though automotive demand only increased by 100,000 in 3Q. Oversupply continues to be a “top issue” for the industry, as more supply will come online in the next six months. However, there is potential for supply issues in the coming months. US Steel and the United Steelworkers are currently negotiating a new contract to replace one that expired in September, and unnamed sources cited by Argus believe that a potential strike by the United Steelworkers (USW) could be “the only action that could turn around the market, save increased production cuts by steelmakers.” (Source: Argus)