China's annual production of aluminum increased by just over 1 million tonnes in the first seven months of 2018, according to the International Aluminium Institute. China produced about 25 million tonnes of global primary aluminum by the end of 2012, which rose to about 35 million tonnes today, overtaking the rest of the world completely.
The country's share of global output has been running around 57% since March -- a new all-time high. No one has been able to compete with China and its "low-cost" capacity. So what is the reason behind the Trump administration's trade tariffs on aluminum? To revive domestic American production while narrowing the trade deficit with China.
This tactic may be working, as older smelters are being brought back to life. Just this past Wednesday, Century Aluminum (CENX) celebrated the reactivation of its Hawesville plant in Kentucky. It had been running at about 40% of annual production since 2015, and was about to close down, as it was economically uncompetitive.
In contrast, in Russia, old aluminum smelters are being closed down after the recent sanctions placed on them. Given U.S. sanctions placed on UC Rusal, the Nadvoitsy plant, which had been operating at about 20% capacity since 2013, will now be permanently closed thanks to the sanctions.
But China, on the other hand, is estimated to bring about 3 million new tonnes of capacity. Trump's tariffs maybe moving things around, but at the end of the day, it does not change the picture of the global aluminum market by much; it is still dependent on China.
The other problem with restarting U.S. domestic plants is that most of them rely on raw materials, alloy, from Canada and China -- and hence, tariffs do not really help the "Make America Great Again" slogan. This heavy reliance on imports is not going to change anytime soon, unless they build new smelting capacity, but that will be entirely impossible to pass through the books, given the competitive pricing structure of aluminum.
The three-month LME aluminum contract hit a high of $2500/tonnes in April of this year. Since then, it has fallen 17%, with most of the fall occurring since June when the tariff headlines started escalating, causing a de-risking effect across all asset classes. Aluminum demand is primarily a function of global GDP, which is now showing signs of slowing down from its synchronized highs.
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Right now, there is a big disconnect between the growth of the U.S. economy vs. emerging markets and the rest of the world. What is important to note is that aluminum has never been a tight "deficit" market. There has always been ample stocks available, if not idle capacity, to restart if prices were right.
Copper, on the other hand, is in a "deficit" mode, and prices need to be higher to encourage producers to produce more in order to cope with the increasing demand -- in the use of electric vehicles and other uses of copper. Unfortunately, copper's fate is linked to the overall Chinese housing construction and residential cycle, as well as their global deleveraging.
The baton is now passed to the yuan and dollar -- and their home countries' respective central banks.
The FX markets will play a big role in the next step for commodities, especially base metals. But when the dust settles, investors need to look at markets that are the tightest, and will rally the most, given pricing dynamics. Quality always wins, while value ("crap") lags, no matter how cheap it is. Cheap can always get cheaper.