HIGHLIGHTS

Aluminum surplus seen falling in China, worldwide

EU carbon tax may bar market to Chinese aluminum

Latin American copper sector may see ‘permanent’ change

London — The aluminum market will be effectively balanced in China in 2021, which will be benign for prices, while copper prices should rebound to average $7,000/mt as moderate economic recovery occurs worldwide, analysts said at virtual events during London Metal Exchange Week.

The two metals have greater upside in a scenario where base metals prices have held up relatively well amid the coronavirus pandemic, backed by government stimulus which is driving infrastructure growth, particularly in China where demand has grown, a consensus of analysts said. Still, demand for both aluminum and copper has fallen this year outside China, they noted.

Eoin Dinsmore, research manager with CRU, said aluminum consumption had been robust for many years but there was no shortage of supply, which had been driven by Chinese production growth. Still, the market surplus should fall next year both within and outside China, putting the market “in much better shape,” he said.

In China, the aluminum market surplus should fall to 600,000 mt in 2021 from 900,000 mt in this year, while outside China it should “shrink” to 800,000 mt from 2.3 million mt, he said.

“China [demand] is rising on a year-to-year basis and has been since April but, outside China, demand is still contracting,” he said on webinars organized by the LME and by BMO Capital Markets. A 12% demand drop is seen outside China, where smelter closures have occurred or been announced at Tiwai Point, Ferndale, San Ciprian and Aluar, he said.

Chinese aluminum production continues to grow fast amid currently soaring profits, with a 7% quarter-on-quarter production growth seen in Q4, and with further growth expected next year, which could be “a real cap on prices for next year,” the CRU analyst said. “Smelters in China are about as profitable as they have been since the financial crisis,” he said, indicating, however, that this could start to fade.

China’s Yunnan province is becoming a hub of 100% hydropowered-backed aluminum, equal to Russia’s production, and should reach production 4.1 million mt next year, Dinsmore noted. However, Chinese aluminum will no longer be competitive in the European Union market once the EU introduces a carbon-border tax, which will have a “big impact” on trade flows, once it is implemented in 2023, and also impact investment decisions, he said.

The European Commission is expected to propose in Q2 2021 a border tax on a carbon footprint of more than 5.5 mt of carbon dioxide per mt of aluminum, which could add a €280/mt ($332/mt) import tax on Chinese aluminum, he said.

The LME aluminum cash price stood at $1,842/mt Oct. 21, having exceeded pre-pandemic levels despite plunging at the height of the first-wave COVID-19 crisis late March.

“An increased emphasis on emissions will drive aluminum prices higher in 2021,” Dinsmore said.

Copper seen reaching $7,500/mt

Natasha Kaneva, executive director, JP Morgan, said China’s strong metals demand should remain supported as long as the nation’s credit expansion lasts. “We expect Chinese metals demand to remain strong until China’s credit cycle peaks, somewhere in 3Q21,” she said.

Copper demand should grow 0.5% year on year this year in China, which increased its cathode imports strongly in June-August, although it will fall about 9% outside China, with recovery foreseen next year and beyond, said Kaneva. Prices are, nonetheless, seen strengthening, to average $7,000/mt in 2Q 2021, later rising to $,7,500/mt amid synchronized global growth, similar to what was seen in 2017, according to JP Morgan’s forecast.

Most market players expect continued demand growth as copper is sought after for charging infrastructure for electric vehicles and 5G installations. China’s five-year plan next year could further boost copper-intensive infrastructure activity.

The LME copper cash price stood at $6,953/mt on Oct. 21, almost 50% higher than its levels of late March.

Copper supply should rebound by 3.8% in 2021-2023 following an estimated 2.1% fall in total supply this year, of around 1.6 million mt, greater than the 1.44 million mt drop originally foreseen, Still, the market should remain in balance next year before registering a 160,000 mt surplus in 2022 and 2023, Kaneva said.

Latin America factors

Juan Carlos Guajardo, executive director of Chilean strategic analyst PlusMining, said that Latin America’s copper industry could see permanent changes from COVID-19. Investment in some mining projects has already been halved and a much more cautious attitude on investments and more efficient agreements with contractors are expected moving forward.

Frictions are rising between mining unions and companies due to increasing levels of automation, he said.

Some 560,000 mt of copper production has already been lost in Latin America, largely Peru, during 2020 amid COVID-19 restrictions, representing a 5% on-year fall in regional output, with further disruption foreseen from a second wave of the pandemic, he said.

“We expect a slight production recovery in 2021, of 1.2% in the Latin American copper industry,” Guajardo said, noting that an impending referendum in Chile and a string of presidential and parliamentary elections coming up in Latin America could also impact the industry, already hit by current strike action at Chilean copper mines.

He said 80% of the Chilean copper industry would be involved in labor negotiations in 2021 compared with 60% in 2020.

Algorithmic trading influence

Tom Mulqueen, head of research at Amalgamated Metal Trading, told the BMO Capital Markets webinar that algorithmic trading may have driven some of the “net bullish” fund investor sentiment in base metals in recent months as a “kind of herd mentality” may have developed amid the strong metals price rally, with computerized trading reacting to technical signals or headlines, exaggerating price moves or shifts in sentiment as metals fared better than other commodities.

“The fundamental drivers [for metals demand] are very much there, in terms of stimulus, the EV outlook, decarbonisation…with US elections and China’s recovery also playing a part,” he said. But markets are still “vulnerable to shifts in sentiment. If the paradigms shift…we could see some big moves.”

Source: S&P Global