Aluminum squeeze might get worse yet

SEATTLE (Scrap Monster): Aluminum—used in everything from Ford F-150 trucks to soda cans—hasn’t risen in price as much as crude oil, liquefied natural gas or fertilizer since the Middle East conflict began.

Some industry experts warn aluminum’s rally is far from done.

To understand why, look at the material that smelters retain to ensure operations run smoothly. Many had a buffer that could see them through weeks of disruption.

But the Strait of Hormuz closure means those stockpiles have likely been run down. Smelters are trucking in raw materials to keep operating, but analysts say that can’t match the volume of alumina and other products that typically come in via the waterway.

“I’m sure most of these stockpiles will now be dry,” said Charvi Trivedi, an analyst at Wood Mackenzie. “So the next month or two will be really critical for the prices, because this is when the actual supply shortage will kick in.”

Before the conflict, roughly one in every 10 metric tons of the world’s aluminum came from the Middle East, much of it sold to the U.S., Europe and Japan.

Output among Gulf producers fell by 35% in April from a year earlier to a more-than decade low, according to the International Aluminium Institute, an industry group. That is probably not the floor, said IAI Secretary-General Jonathan Grant.

He called it “a slow-motion supply chain shock.”

Even if the strait reopens, resuming smelter production might take six months. Damaged facilities could take longer.

“It’s not as simple as switching on and off a plug,” Trivedi said.

Trivedi estimates up to 3.5 million tons of Middle East aluminum production will be lost this year, roughly half the region’s recent annual output. Global supply will contract by nearly 3%, she said.

Since the conflict began, the aluminum price on the London Metal Exchange has risen by roughly 16%. Aluminum traded around $3,655 a ton on Friday, near a four-year high.

Morgan Stanley offered reasons why aluminum prices haven’t risen as sharply as some investors expected. Strong shipments before the conflict likely provided some buffer for buyers, while regional premiums “have done some of the work,” rising sharply across the U.S., Europe and Japan.

Still, JPMorgan forecasts the largest annual market deficit since 2000. It reckons prices could reach around $4,000 a ton in coming months, regardless of whether or not the strait reopens.

“We think we could see real physical scarcity of metal over the next six months in Europe or in North America,” Alcoa Chief Executive Bill Oplinger told a Miami conference this month.

Not everyone is tipping another imminent rally. Fastmarkets analyst Andy Farida believes the aluminum price could do with a pause given how far it has already risen.

Others cite soft demand signals, high Chinese inventories and elevated long positions—or bets among investors that prices will rise—as reasons for caution.

Jefferies analysts recently fielded a surge in calls and emails from investors trying to assess how much higher aluminum could go.

“I would tend to agree with the bulls on this,” said Jefferies analyst Chris LaFemina. “If the Strait of Hormuz bottleneck does not get resolved, prices have to go higher for the market to balance.”

Yet he’s wary about what happens if China tries to fill the void.

China accounts for about 60% of global aluminum output. It has in recent years capped annual production at 45 million tons to curb industrial overcapacity.

Wood Mackenzie’s Trivedi considers a global recession to be the biggest threat to aluminum prices. The International Monetary Fund has warned the world risks sinking into a deep downturn the longer the strait remains shut.

“Only then can the demand and supply meet at some level,” she said.

Courtesy: www.msn.com