May 13, 2022

Aluminum prices rallied until early March; however, the 3M Select contract has tumbled from a high of $4,073/mt on March 7 to $2,770/mt (7:30AM CST), despite the ongoing Russia-Ukraine conflict. That contract plunged 12.5% in April alone, making it the worst month since 2008, and another 8% in May so far.

Prices have fallen as China’s aluminum demand has dropped due to COVID lockdowns. Approximately 327.9 million people in over 40 cities, accounting for nearly 31% of the country’s GDP are under full or partial lockdown, according to Nomura International. With demand lagging, the country exported 597,000 mt of unwrought aluminum in April, the second-largest ever monthly volume, according to Bloomberg and Chinese Customs data.

Also, fears of Russian supply issues have subsided. Russia’s aluminum producer, Rusal, which is the largest producer outside of China and a major exporter, lost its Ukrainian and Australian alumina supplies due to logistical issues and sanctions. However, China has helped to partially fill the void, as the country will export 200,000 mt of alumina in April and May, with most going to Russia, according to anonymous traders cited by Bloomberg. Shipments of alumina from China to Russia began in late March when exporters sent several test cargoes. At that time, anonymous traders quoted by Bloomberg stated those initial shipments were to test “whether the cargoes face any logistics issues or problems with sanctions, with more ready to ship if all goes well.”

Aluminum end users might take advantage of the recent drop in prices by using simple hedges involving swaps and call options. These could cap your aluminum costs, guarding against a price recovery. Such positions are standard for consumer hedging, but they can result in opportunity costs or cash costs if metal prices decline. Please contact AEGIS for specific strategies that fit your operations.

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