Aluminum Rebound in China,A Problem Worth Considering

However, due to an increase in water supply, China`s domestic production rebounded by an annualized three-quarters of a million tons over the second quarter. This raises the serious risk that Chinese imports of Russian material will decline in the second half of the year. Meanwhile, Russia has continued finding customers for its primary metal. However, European Aluminum producers are now voicing concerns about Turkish semi-finished products flooding the market, supported by cheap Russian primary metal. Indeed, the potential loss of a significant proportion of Chinese demand may result in more Russian metal flooding the LME. This could lead to a pool of almost exclusively Russian metal with limited buyers. This, in turn, could potentially undermine LME aluminum prices compared to those physical buyers would have to pay for non-Russian metal.

The LME may argue that mechanisms exist to accommodate such distortions. Examples include the physical delivery premium, which has always been a measure of regional demand relative to global demand.

However, this premium is incapable of reflecting specific brands or origins. As we previously reported, the LME has periodically reviewed and decided against banning deliveries of Russian metal. A reason for this is concerns about the legal consequences, as Russian metal is not subject to sanctions. If a discount emerged, it could open the possibility for a Price Reporting Agency to launch a Non-Russian Delivery Premium. Both mills and consumers could use this to reflect the true cost of the metal supporting their processing. Though we haven`t reached that point yet, the possibility continues to cause concern among metal buyers. Therefore, perhaps it should be a more pressing matter of consideration.