March 2, 2023

Last month, smelters in China’s top aluminum production region, Yunnan province, curtailed another 650,000 to 800,000 mt in annual capacity due to power rationing, according to Caixin. This is even deeper than the 415,000 mt of annual capacity requested by local authorities in mid-February. AEGIS notes that aluminum prices are essentially flat since this latest round of curtailment requests and are similarly flat on the year. Given that LME aluminum prices were down over 15% last year, and that supply issues in China are potentially bullish, AEGIS believes this is an excellent time for consumers to lock in future usage. (Source: Bloomberg)

AEGIS also notes that this latest round of curtailments now brings Yunnan province’s total cuts to 1.9 million mt in annual production capacity, meaning that approximately one-third of the region’s production is now offline. At 5.3 million mt, Yunnan Province’s annual capacity is responsible for about 12% of China’s aluminum production capacity. AEGIS also wonders how long this production will remain offline, and more importantly, if Chinese consumers will need to fill the void by further relying upon imports.  Likewise, will more curtailments occur, and will that force end-users to pull even more from global supplies?

As AEGIS suggests, this latest round of curtailments and the possibility of more or prolonged cuts provide a bullish catalyst for LME aluminum. However, end-users can hedge this price risk via swaps or call options. Such positions are standard for consumer hedging; however, they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. (3/2/2023)      

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Price Indications

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