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Aluminum state of the art: an outlook on a global market in surplus

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What is behind the decline in Aluminum's value?

To better analyze the aluminum market, it is worth taking a step back and starting with a specific period: April 2022, this date is significant as aluminum has more than halved in value since then. There are many factors behind this negative performance, one among them being the abundance of material present globally. WBMS estimates a primary aluminum output of 51,805k tons (as of September 2023) compared to an apparent consumption of about 50,841k tons, generating an implicit surplus of about 946k tons. To wit, last year during the same period, the surplus was about 271k tons, a significant increase.
Analyzing stock levels on London Market Exchange (LME), these have been in a steady decline since August 21, 2023, a dynamic that should normally provide support for quotations, but not always respected as more than half (about 52%) of this decline comes from cancelled warrants. Aluminum warrants, similar to bearer documents, are cancelled when the holder requests physical delivery and the materials are delivered to him or her from one of the designated warehouses. The same are no longer available for trading, as they are simply moved tending to lower cost warehouses but not impacting the total quantity in the system. The actual stocks on LME actually available amount to 200k tons.

Aluminum, a matter of redundancies

The evidence of the abundance of material present is some 329k tons stored in Asian warehouses earmarked for the issuance of warrants for inclusion in LME warehouses. Aluminum is stored pending registration for LME warrant issuance, marking an abundance of material ready to enter the market, which poses a major drawback to price expectations. The importance of where the raw material comes from should be kept in mind, given the presence of enforced sanctions on Russian d use. Russian metal already accounts for about 80 percent (as of the last LME report it amounts to about 155 metric tons) of open stocks in the LME system. This points to intense utilization by European producers. It often happens that LME storage dynamics are ambiguous, leading non-users of Russian aluminum to be reluctant to mandate storage. The risk is that the origin of the two metals will be mistakenly confused, leading to undue penalties. As a result, the LME through its stock reports, could provide a misleading view of the state of the aluminum market (it is clear that what is manifested on the LME does not fully reflect the complexity of the physical market). Another confirmation comes from the financial branch of this "over supply" in the system which has been reflected in a sharp discount in the spot price to the 3-month futures, which, as of Thursday, December 14, stood at $38 with peaks as high as $45 in previous days. Strong expectations in the central economic labor conference in China further contributed to the price decline.The absence of economic stimulus measures from the real estate sector caused general pessimism in the market.

What will drive the demand for commodities in the upcoming months

In recent days, theFederal Open Market Committee's (FOMC) decision to keep rates unchanged has weakened the dollar by providing support for prices. A depreciation of the dollar against a basket of foreign currencies is an important demand driver for commodities, allowing the buyer greater purchasing power.
Looking at data on trader positioning, i.e., reports where changes in speculator positioning are highlighted, there is a clear bearish bias. The levels of short positions resulting from the report are steadily increasing, reaching levels where one would have expected traders (consumers) to enter. Bearish expectations seem to lead participants to wait until the end of the year in the hope of further declines in quotations. The aluminum market faces a still very uncertain macroeconomic environment. PMIs remain weak for major economies although, as is often the case, we find big differences: on the one hand, China touches the highest level of primary aluminum imports recorded in two years, with domestic demand holding up. Meanwhile in Europe and America, premiums for receiving the physical are sinking and demand for the sector is stagnant with inventories rising steadily.

Since April 2022 there has been a production surplus of about 946k tonnes

Alessandro Barbieri

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