Defining trends of the super cycle

Base metal prices have increased steadily over the past year, affected by strong demand and supply constraints as well as by factors such as high energy costs, soaring freight rates and, now, the Russia-Ukraine war. This last factor, especially, has thrown prices for aluminum and nickel into turmoil since March.

Aluminum flip flops

The primary aluminum industry already was reeling under the impact of major power shortages across Europe and China when Russia invaded Ukraine in February.

Since the first half of 2021, many primary aluminum producers across the EU have curtailed or shut operations because of high electricity prices. Eurometaux, a European nonferrous metals association, estimates that about 650,000 metric tons of aluminum capacity were idled because of this issue. The Russia-Ukraine war coinciding with these events has exacerbated the deficit in global aluminum supply.

As the war broke out, the U.S., EU, and the U.K. implemented sanctions against Russia to cut off the latter from global trade, which acutely affected aluminum trade given that Rusal, the largest aluminum producer outside of China, is a Russian company and supplies roughly 5 percent of global demand.

UC Rusal lost access to many of its raw material sources. The first blow, as a direct result of the war, was the suspension of operations at the company’s Nikolaev alumina refinery in Ukraine March 1. This plant supplies around 1.75 million metric tons of alumina feedstock to Rusal’s Russian smelters.

Weeks later, Australia banned exports of alumina and bauxite to Russia. Because of this, Rusal lost access to about 20 percent of the alumina feedstock imported from its joint venture with Rio Tinto, Queensland Alumina, and other Australian suppliers. Rusal’s only remaining option for alumina was its Aughinish refinery in Ireland, but the company’s bauxite mine in Guinea stopped shipping ore to Ireland because of the war in late March. As of early April, participants estimate that Rusal has only a few weeks of alumina supply at its smelters.

As Rusal loses access to feedstock, its primary aluminum output is expected to drop, denting global supply. Moreover, even the current stockpiles might not be accepted by traders across the West. These events have wreaked havoc on benchmark London Metal Exchange (LME) aluminum prices, causing swings of almost $500 per metric ton on both sides through March and impacting the aluminum value chain.

Apart from Rusal’s predicament, the war has had three key impacts on the aluminum industry:

Primary aluminum premiums in the U.S. and EU have moved up because of disrupted ocean freight and metal availability. The cost of fuel also has shot up in both regions, raising the cost of inland trucking, which further spurred the premiums higher. The Davis Index for 6063 billet premiums in the U.S. rose by 16.5 percent to 36.5 cents per pound above P1020 at the end of March compared with 31.3 cents per pound delivered in the preceding month. Traders are now scrambling to find or book billet cargoes from alternative outlets, such as South America or Southeast Asia.

Volatile LME prices have dampened activity in the global import and export market since March as several buyers have retreated, waiting for some stability or price direction. Sellers, on the other hand, continue to raise offers, which has pushed domestic U.S. secondary scrap prices higher. In fact, U.S. secondary aluminum scrap prices are at an all-time high in early April because of tight supply paired with these export circumstances. For instance, the Davis Index for old sheet aluminum scrap has grown by about 13.5 percent from 81.7 cents per pound delivered Feb. 23 to 92.7 cents per pound delivered to compete with export prices during the war.

Intermediate and downstream aluminum producers also are facing raw material price inflation and supply chain issues arising from the war. Consumer industries, such as automotive, packaging, construction and others, are paying higher prices for raw materials that include extruded, rolled and other semifinished products. These costs will be passed on to the final consumer, eventually raising prices for consumer goods.

Nickel gets a wakeup call

Since late 2021, LME nickel prices have trended upward because of pent demand from the stainless-steel industry and depleting LME warehouse inventory as the metal gains traction in emerging sectors such as electric vehicle batteries.

Sanctions on Russia, the third-largest producer of nickel, after its invasion of Ukraine have put further pressure on supply of this in-demand metal. Russia produces 270,000 metric tons of nickel per year, and a pause in supply has raised concerns over the metal’s availability.

Moreover, Chinese nickel giant Tsignshan purchased a huge volume of nickel to reduce its short position in the market March 8, which led to a suspension of LME nickel trade after prices reached around $100,000 per metric ton within a few hours. This did not bode well for the market.

Stainless steel mills began canceling orders as they could not keep up with increasing nickel prices, surcharges and promised delivery dates. Many market participants who were hedging their trades based on LME nickel prices had to pause them until the metal began trading again, leading to daily losses.

Large processors in the U.S. stopped quoting prices for stainless steel, leading to widespread confusion in the market. Market participants blamed the turmoil in nickel and stainless steel squarely on dropping LME nickel inventory levels, with the war coming a distant second.

A week later, when nickel trade resumed on the LME, prices began to decline drastically, which also pushed stainless steel prices downward for the first time since the beginning of 2022. The Davis Index for scrap 304 solids in the U.S. stood at $1.25 per pound when nickel trading resumed March 16 and dropped to $1.16 per pound by March 22.

Similarly, prices for 316 solids also dropped from $1.725 per pound March 16 to $1.655 per pound March 22. However, prices resumed their upward trajectory March 23 on strong demand for stainless steel despite market volatility. That said, U.S. stainless steel prices had not stabilized at the beginning of April given the LME nickel fluctuations.

Stainless steel scrap processors continue to remain optimistic about the market as demand for nickel and stainless steel remains strong. With the world economy opening after two grim years, the need for nickel has increased globally. Despite near-term uncertainty, long-term prospects remain positive.

For example, to support the growing global demand for nickel, Indonesia recently announced its plan to increase nickel output by 362,874 metric tons this year to reach 1.2 million metric tons annually. Nickel production in the Philippines also is expected to increase this year as the country plans to add 12 new mines, mostly nickel projects, after nickel output increased 17 percent last year to 386,359 metric tons.

All these factors are expected to keep the stainless-steel market busy for the rest of the year as in 2021, when global stainless-steel production grew by 10.6 percent to 56.2 million metric tons annually, according to the International Stainless Steel Forum, Brussels.

Copper, zinc and high energy costs

The super cycle in copper and zinc prices since September 2021 mostly has been caused by strong demand after economies reopened after the COVID-19 pandemic, along with Europe’s struggles with high energy costs and the resultant reduced capacities and smelter shutdowns.

Moreover, the two metals are being viewed as frontrunners in the renewables race. Electrification and EV batteries are the new horizons for copper consumers, whereas battery storage, auto parts and galvanized steel are zinc’s hot sectors. Demand for the two metals has remained historically high, with consumers remaining undeterred by soaring prices.

For example, special high-grade zinc premiums have risen by almost 20 cents per pound since September 2021, when LME zinc began its upward trajectory. Toward the end of March, the Davis Index for SHG zinc premiums in the U.S. was averaging between 27 cents to 28 cents per pound delivered consumer. By the first week of April, these premiums had jumped to nearly 30 cents to 31 cents per pound delivered. Premiums in Europe were even higher given that most smelters in this region were operating way below capacity to save on high electricity costs.

The three-month LME zinc contract has increased by more than $650 per metric ton from its October 2021 peak of $3,755 per metric ton to a record high settlement of $4,408 per metric ton at the beginning of April. LME zinc was at a 16-year high when April began and was fast approaching its 2006 peak of $4,580 per metric ton.

Like nickel, zinc’s price increase, especially in the terminal markets, can be attributed in part to depleting inventories at LME warehouses. At the beginning of April, LME warehouse stocks totaled nearly 140,000 metric tons, a decrease of nearly 3,000 metric tons since the start of the year.

Tight supply in the primary zinc market is expected to continue at least until the end of the first half of 2022. The latest data from the International Lead and Zinc Study Group, Lisbon, Portugal, also notes that global refined zinc demand outpaced production at the end of 2021, ending with a deficit of 192,000 metric tons. Total inventories for the material fell to nearly 793,000 metric tons against 989,000 metric tons in 2020.

The latest data from the International Lead and Zinc Study Group also notes that global refined zinc demand outpaced production at the end of 2021, ending with a deficit of 192,000 metric tons.

Similarly, the International Copper Study Group (ICSG), Lisbon, noted in its March commentary that the copper market remained in a deficit despite an increase in refined copper production during the year. The ICSG estimated an apparent deficit of 475,000 metric tons in 2021, while refined copper consumption grew by 1.4 percent last year.

Pent-up demand from the pandemic has continued to outpace supply in the copper market, and this was felt even more acutely during the winter months. Spreads for copper scrap, for example, moved within a very narrow range through the first quarter despite COMEX copper prices jumping to approach the $5 per pound mark at the beginning of April. Spring, however, has been a different matter with supply improving, resulting in a slight widening of spreads at the beginning of April.

However, supply in the export market remained limited through March, in part affected by the Russia-Ukraine war. According to ICSG data, Russia accounted for 4 percent of global copper production at 875,000 metric tons in 2021 through mines owned by Norlisk, UMC and Russia Copper Co.. The country consumes roughly 370,000 metric tons of this output every year. The sanctions on Russia, along with a 15 percent export tax on the metal imposed by the Russian government last year, are likely to result in very less volumes of this metal from Russia this year, adding to the tight supply of copper.

Davis Index’s Divya Shastry is a stainless steel analyst and can be contacted at divya.shastry@davisindex.com, George D’Cruze is an aluminum analyst and can be contacted at george.dcruze@davisindex.com and Radhika Ojha is editor, Americas, and can be contacted at radhika.ojha@davisindex.com.