The London Metal Exchange price of aluminium has followed the worldwide meltdown in recent weeks with the benchmark three-month price now hovering just above one-year lows around the $1,750-per tonne level.


By Andy Home /London


Aluminium premiums are in meltdown the world over.
The London Metal Exchange (LME) price of the light metal has followed them lower over recent weeks with the benchmark three-month price now hovering just above one-year lows around the $1,750-per tonne level.
This is not how things were supposed to play out.
The accepted wisdom was that if premiums fell, the LME basis price would rise in compensation, keeping the “all-in” price unchanged.
The “all-in” price, however, has sunk from December highs of $2,500 per tonne to just $1,900 per tonne.
It’s possible the speed of the collapse in premiums has temporarily destabilised the relationship between premiums and LME price and some sort of time-lagged correction will take place.
However, the alternative possibility is that the falling “all-in” price is actually telling us something important about the overall state of the global aluminium market.
Namely that it is oversupplied (again) and that the price may have to fall further if supply and demand are to be rebalanced.
Global aluminium usage grew by 9.00% last year and is likely to grow by another 6.50% this year, according to US producer Alcoa’s Q1 financials presentation.
Such a super-strong growth rate makes aluminium a stand-out from just about every other industrial metal and reflects transformational shifts in the automotive sector with the light metal grabbing usage share from steel.
The only problem for producers such as Alcoa is the fact that global production is now growing even faster, running at 10.3% in April and at a cumulative 6.8% over the first four months of the year, according to the International Aluminium Institute.
The main driver of that growth, as it has been for many months, is China.
Annualised production in China has risen by almost twomn tonnes to 31.5mn since the start of January.
Production outside of China, by contrast, has only crept higher to the marginal tune of 255,500 tonnes annualised over the same four months.
Which wouldn’t matter if what China produced stayed in China.
China’s 15-percent export duty on primary aluminium has historically kept the country partly isolated from the international market.
Alcoa chairman and chief executive Klaus Kleinfeld once famously described the two parts of the global market as “parallel universes”, co-existing but rarely interacting.
Even at the time such a view meant brushing aside the inconvenient fact that China was a significant exporter of aluminium in the form of semi-manufactured products. These are not only free of export tax but qualify for a tax rebate.
However, the outbound flow of such “product” has in the interim increased to the point that it’s impossible to ignore.
A massive 3.67mn tonnes seeped out of the Chinese market last year, a 20% increase on 2013. And the flow is still accelerating, up 46% to 1.45mn tonnes in the first four months of 2015.
Not only do such product exports serve to displace demand elsewhere but they include an unknown element of barely transformed metal, which is exported only to be remelted and reenter the primary supply chain. Such remeltable exports are highly price sensitive and the collapse in Western premiums may help stem the tide.
But the real problem is the rebate on genuine products, which Beijing appears in no mood to change.
Indeed, it has just cancelled a 15-percent export tax on some forms of rods and bars, both in primary and alloy form. Experts such as Paul Adkins at AZ China play down the impact the tax code adjustment will have, arguing these are very specialist products and that China is in effect just tidying up a couple of anomalies.
But the symbolism is significant.
Faced with increasingly vocal international pressure to stem the flow of products, China has done just the opposite.
The unwelcome fact for producers outside of China is that the country’s exports are filling any deficit resulting from their collective supply discipline.

* Andy Home is a Reuters columnist. The opinions expressed are his own.