Chinese Aluminum Supply Issues Could Rally Prices

China, which is the largest aluminum producer and exporter, is experiencing potentially bullish production issues. Sichuan province, a key production area that is experiencing a severe drought, has temporarily shuttered all its aluminum production due to power rationing. This has removed approximately 1 million mt/yr out of production, or 2.4% of the country’s total annual capacity, according to Mysteel. The power cuts in the Sichuan province have also suppressed some aluminum demand, as the provincial government has requested that manufacturers stop production. 

Prior to the recent production cuts, China's total monthly aluminum production was at an all-time high. According to the most recent data from the International Aluminum Institute, production in June dipped to 3.356 million mt, down from 3.444 million mt in May. However, July's production just hit a new record at 3.468 million mt.

Aluminum's forward curve has also shifted from backwardation to contango in recent weeks. Prices are nearly unchanged compared to a month ago; however, prices are significantly lower than where they were three months ago. Aluminum end-users might consider utilizing the recent selloff to hedge future needs.

Think that aluminum prices are finding a bottom? End users can hedge aluminum in a variety of ways, as we detail below. Buying swaps or call options are viable strategies, as either would establish a maximum aluminum price. 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.

Questions or comments? Reach out to our Metals team here: metals@aegis-hedging.com

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