Aluminium price recovery limited despite recent LME highs

Aluminium prices on the London Metal Exchange have slipped after trading at its highest level since 2022. 

Prices on LME have increased from this year’s low of $2,124 per ton in February to $2,919 per ton last month. Currently, the three-month contract on LME were hovering at $2,855 per ton.

However, experts believe that further recovery potential for aluminium prices remain limited. 

The reason behind the recent price increase in aluminium has been two-fold. 

The rise in aluminium prices is attributed to the warming relations between the US and China. The two governments have resolved several contentious issues, fueling optimism for a sustained resolution to their trade dispute.

US-China relations provide hope

Beijing's government has decided to delay the implementation of new restrictions on rare earth exports by one year. Additionally, the government has restarted the import of soybeans from the US.

The US government is, in turn, lowering tariffs on goods imported from China by 10 percentage points.

“This reduces the economic risks for China, the most important sales market, where demand for aluminum has recently proven to be robust,” Thu Lan Nguyen, head of FX and commodity research at Commerzbank AG, said in a report. 

Imports of unwrought aluminum and related products rose by about 6% in the first nine months compared to the previous year, based on figures from the customs office.

Nguyen said:

Russia now supplies over half of China's refined aluminum imports, a significant increase since 2021.

Aluminum imports from Russia have recently reached as high as 90% at times, with the most recent figure standing at approximately 70%. 

This represents a significant increase compared to 2019-2020, when aluminum imports from Russia averaged 30%.

Supply concerns

“However, the more favorable demand outlook following the recent progress in negotiations between the governments in Washington and Beijing is unlikely to be the only reason for the firmer aluminum price,” Nguyen added. 

Considering that China is also the primary sales market for other base metals, they too would have benefited. Despite this, the price of copper saw a significant drop late last week.

LME inventories began to decline again in early October. 

This followed a recovery in the preceding months, which is thought to have been prompted by a strong outflow to the US as a result of US tariffs.

Trend reversal

Conversely, the trend recently saw another reversal. 

LME inventories increased by approximately 100,000 tons at the close of last week, which more than offset the entire decline observed since the start of October.

“As the inflows are said to have occurred mainly in warehouses in Malaysia, this could indicate increased exports from China,” Nguyen said. 

China is the world's leading producer of aluminum, as well as its most significant consumer.

While aluminum production in China has been hovering near the government's upper limit and stagnating for several months, the output remains substantial.

The prolonged increase in aluminum prices is therefore unlikely to be a consequence of current material shortages, according to Nguyen.