June 22, 2022

The Henan province, which is a key aluminum production region in China, could curb production if power generation problems occur this summer, according to Reuters. The province experienced a record power load this past Sunday, and “electricity supply in Henan is expected to be relatively difficult this summer,” according to Reuters’ summation of a state media report from this past weekend. Andy Home of Reuters predicts “power will be prioritised for cooling homes with big industrial users facing rationing.” China produced a record 3.423 million mt of primary aluminum in May, according to the National Bureau of Statistics.  The Henan province produces about 36% of China’s primary aluminum, according to the South China Morning Post.

China has become a major aluminum exporter to Europe in recent months, as domestic demand has waned while European supplies have shrunk due to power-generation issues. Production issues in China could therefore affect supplies in Europe and the global balance of supply and demand. End-users who are concerned that shrinking global supplies might support aluminum prices could consider applying simple hedges involving swaps and call options. One other possible strategy is a costless collar. In this case, a “zero-cost collar” creates a maximum and minimum aluminum price for a consumer, as they would simultaneously buy a call option (creating a cap, or maximum) and sell a put option (creating a floor, or minimum). The call and put premiums offset, making the construction costless. It is popular because of the upside price protection, but you sacrifice access to much lower prices if prices should fall. Such positions are standard for consumer hedging, but they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. (6/22/2022)

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