China’s primary aluminum importers have significantly increased purchases in recent months due to low global prices and improving arbitrage. Although LME prices could remain rangebound due to low demand elsewhere in the world, Chinese import buying could help to set a floor in the market. With aluminum prices hovering near 12-month lows, this could be a good time for consumers to hedge end-usage for 2024 and beyond.
Market Insights
Aluminum Buyers Should Hedge Alongside Chinese Importers
China’s primary aluminum importers have significantly increased purchases in recent months due to low global prices and improving arbitrage. Although...
China ramps up imports... As the following charts illustrate, Chinese importers are very opportunistic aluminum buyers. Prior to 2021, Chinese importers generally increased buying when LME prices dipped below $2,000/mt. One notable exception is 2019 when China was going through a long period of inventory destocking. Since 2021, however, spikes in import buying have occurred even with prices above $2,000/mt. As we will see in a moment, this could be due to an improved arbitrage between SHFE and LME prices. |
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Will the imports continue? These primary aluminum imports could spike again in September while the import arbitrage continues to improve. The spread between spot SHFE and LME prices is generally used to estimate the import arbitrage that Chinese aluminum importers are subjected to. Based on monthly average prices, this spread currently hovers near $446/mt (SHFE over LME), the highest level of 2023. This could suggest that Chinese importers might grab cheaper foreign supplies while price spreads remain advantageous. (Source: China Customs, SHFE, LME) |
Where are global prices? Although prices have increased slightly since mid-August, and the forward curve remains in a steep contango (meaning futures prices are higher than spot), prices still hover near the pandemic-era lows. As the chart below illustrates, prices throughout 2024 are still within this year’s trading range. This could be a good time for aluminum consumers to hedge future end-usage or inventories. |
This price risk can be hedged! Aluminum consumers can reduce or eliminate price risk by hedging at a predetermined price. In this case, they would buy LME Aluminum swaps or options to protect against future physical purchases. These financial hedges are done through a counterparty (such as a bank or a broker) and are not meant to replace any purchases in the physical market but are a supplement to them. Hedging future purchases via LME Aluminum swaps will make you less susceptible to the highly volatile spot market. As we near the last quarter of 2023, some aluminum buyers might be calculating their potential end usage for 2024. The chart below demonstrates the current average price for 2024 LME Aluminum futures and several ways an aluminum buyer can mitigate this price risk. |
AEGIS can build your hedging program. AEGIS can help aluminum buyers develop specific strategies that fit their operations. We are also happy to introduce new clients to more counterparties, therefore ensuring that you are receiving the best possible price. Please contact us for details. |
Questions or comments? Reach out to our Metals team here: metals@aegis-hedging.com
Important Disclosure: Indicative prices are provided for information purposes only and do not represent a commitment from AEGIS Hedging Solutions LLC ("Aegis") to assist any client to transact at those prices, or at any price, in the future. Aegis makes no guarantee of the accuracy or completeness of such information. Aegis and/or its trading principals do not offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Certain information in this presentation may constitute forward-looking statements, which can be identified by the use of forward-looking terminology such as "edge," "advantage," "opportunity," "believe," or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities.
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