• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Basic Materials

What Is Behind the Rise in Aluminum Prices?

Rather than a squeeze on aluminum, this is about how warehousing companies are managing inventory based on spreads, physical premiums and carry.
By MALEEHA BENGALI
Oct 04, 2018 | 06:15 AM EDT
Stocks quotes in this article: AA, NHYDY

The LME 3-month aluminum price jumped 4% yesterday on announcement that Norsk Hydro (NHYDY) will temporarily close the Alunorte alumina refinery in Brazil because of a water treatment dispute. This outage will curtail the supply of alumina, which is an ingredient used to make aluminum.

The alumina market has been tight over the past few months due to U.S. sanctions on Russia's United Company Rusal. Despite the plant running below 50% capacity, given the games circulating in the aluminum market, news of any supply disruptions catches the market by surprise. Alumina price is up 45% this year, but higher prices will and have encouraged other producers to start production. China has now become a net exporter.

Some observers have pointed to the low LME (London Metal Exchange) aluminum inventory stocks -- which are down 17% over the past few months -- as yet another bullish trigger. These are at the lowest since January 2006, at 608,500 tonnes.

But there is a warehousing game going on that is causing these stocks to be depleted, as opposed to "tightness" in the market. What we are seeing now is the reverse of the LME inventory stocks boom in 2009, which was exacerbated at the time by falling demand -- but also a squeeze on credit.

Rather than a squeeze on aluminum per se, this is more about how the warehousing companies are managing their inventory based on spreads, physical premiums and carry. Following the rule change on queues allowed, caps on rent and faster load-out requirements, it has allowed metal to shift to alternative sources. This is all just an unwind of the excess prior to 2008. These inventory moves are all part of warehousing games -- and we will see the metal appear and disappear based on the financial metrics that drive these companies.

  • Jim Cramer: Does the Fed Want to Crush Wage Growth?
  • There's a Lot Going On Under the Surface

The aluminum market is definitely supported by the alumina price going into the fourth quarter. Rusal accounts for about 13% of the global output outside China. It produced 3.71 metric tonnes of primary aluminum in 2017 and earned about 14% of its revenue from the U.S., its largest importer.

The key question is what will happen to the sanctions imposed on Rusal. The deadline is November 12. An extension of the deadline will help European buyers purchasing from Rusal's refinery in Ireland. But if the sanctions are not lifted, the market can potentially lose 1.5 million tonnes.

As we enter Q4, Chinese capacity cuts can also materialize. During the winter period, aluminum/alumina production is cut by 30% to clear the smog in provinces. But smelters have yet to announce their plans for the winter. If they can manage to meet the minimum discharge limits, perhaps production can be cut by less.

There are a lot of moving parts in the aluminum market. If these sanctions are not lifted, aluminum could be in for a doomsday scenario and prices could shoot towards $2500/tonne. Especially if Chinese stimulus boost to infrastructure plays out and demand recovers, the market can move higher. It is not as tight as, say, copper, as there is supply out there, it just needs to be free to hit the market.

Despite cheap valuation, Norsk Hydro will not be able to benefit from higher prices, given its legal and operational problems. If Alunorte is out for the remainder of 2019, its earnings can be downgraded significantly, with the company turning free cash flow negative. Alcoa (AA) is doomed by its strikes. Indian producers stand to benefit the most from these U.S. sanctions and higher prices -- especially integrated domestic producers like Hindalco and National Aluminum Company.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
TAGS: Commodities | Markets | Basic Materials | Investing | China | Futures

More from Basic Materials

PPG Industries Is Painting a 'Shaky' Picture Ahead of Earnings

Bruce Kamich
Jan 19, 2023 11:20 AM EST

Sellers appear to be moving to a more aggressive stance on the stock.

This Stock's Charts Say a Lot About Homeowners

Bruce Kamich
Dec 30, 2022 2:12 PM EST

As we review Azek, we see why Americans might be building lots of decks this year -- and why this might be a good knock-on trade.

Vale: Mining a Stock With Long-Term Promise

Bruce Kamich
Dec 23, 2022 9:41 AM EST

Over the years, I have learned to look beyond current distractions and focus on longer-term trends.

Bunge and Agriculture ETFs Are Attached to the Same Cord

Bruce Kamich
Jul 8, 2022 8:45 AM EDT

Here's our outlook for shares of the agricultural company.

Commercial Metals Is Poised for an Upside Breakout

Bruce Kamich
Dec 28, 2021 11:45 AM EST

Let's review the charts and indicators.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 03:06 PM EST BOB LANG

    LEAPS Webinar

    This week, I offered a free webinar session talkin...
  • 02:53 PM EST REAL MONEY

    LIVE EVENT: Chris Versace and "Sarge" Guilfoyle Share Their Stock Market Insights

    This Monday, Jan. 30, at 12 p.m., our very own exp...
  • 04:58 PM EST REAL MONEY

    The Latest AAP Podcast!

    Listen in as AAP Tackles Earnings, the Fed, Recess...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login