Requiring warehouses to ship out more aluminium than they take in when queues are more than 50 days will force down queue lengths, which in some cases have been more than 400 days. With 4 million tonnes of metal potentially released onto the market as a result of the new rules the likely outcome is a drop in prices.
The scale and longevity of the decline will depend on how quickly the stock overhang is unwound. This depends on whether warehouse owners take steps to avoid the limitations, for example by moving stock between warehouses to maximise queue lengths. The overhang could therefore take anything between a few months and two years to disappear, although the longer the process takes the smaller the impact on prices is likely to be.
Although lower prices will be negative for aluminium producers, the impact will be temporary and in the longer term the LME’s changes mean prices will trade more in line with the fundamentals of supply and demand. This will be positive for the market as a whole. End-users, for example, will find it much easier to hedge their costs because hedging is only possible on the base LME price of the metal, whereas in the last year up to 20% of the “all-in” market price (base price + physical premium) has been in the physical premium.
“We expect demand growth to continue due to increasing per capita consumption in China. Consumption is still little more than half that of the peak per capita levels in Germany and Korea, and as peak aluminium consumption occurs at a later stage in the industrialisation process than for steel there is still significant room for demand growth,” Fitch Ratings in a statement said.
“We see limited downside risk for prices, excluding any short-term impact from warehouse de-stocking. This is because around 30% of global producers have production costs above $1,900 per tonne and any extended fall below that price would lead to shutdowns and constrain supply,” it added.