Ground Breakers: Is the boom in aluminium prices over?

Aluminium prices have fallen from 2022 highs of US$3849/t on March 4 to US$2788/t
Disparate forces of low supplies and weak demand are pulling each way on the aluminium market
ASM and Chrysos Corporation rebound on good news

Powered to decade-long highs by a military coup in leading bauxite supplier Guinea last year and fears over Russian supply lines after the invasion of Ukraine, aluminium has come crashing back down to Earth along with other metals as China’s lockdowns have turned the demand taps off.

Aluminium hit near-record three-month prices on the LME of US$3849/t on March 4, with similarly strong price moves for alumina feedstocks, receiving an additional bump when Australia announced a suspension on alumina and bauxite exports to Russia, threatening supply for dominant global supplier Rusal’s aluminium factories.

But they have since fallen over 25% to just US$2788/t.

Experts say demand has been challenged not just by China, which indicated its seriousness around its Covid Zero strategy by relinquishing the hosting rights to next July’s Asian Cup soccer tournament, but also ironically by the energy price spike in Europe resulting from shadow sanctions against Russia.

“Demand concerns have recently weighed on aluminium prices, much like a number of other mining and energy commodities,” Commbank’s metals guru Vivek Dhar said.

“China’s COVID‑19 restrictions and lockdowns are the chief concern for markets, especially with China accounting for ~55‑60% of global aluminium demand.

“The extent that lockdowns linger is a key downside risk and uncertainty facing China’s near-term commodity demand outlook.

“Demand concerns though have also emerged even outside of China ‑ especially in Europe. Downstream manufacturing faces significant challenges with the high energy price environment and the prospect of rising interest rates. Europe accounts for ~13% of global aluminium demand.”

Friday bump

At the same time warehouse stocks are very low, providing a potential basement for the industrial base metal.

Prices shifted 1.7% up on Friday, defying a downward trend across the base metals complex.

“Metal available for withdrawal from LME warehouses plunged to a record low,” ANZ’s David Plank said.

“This comes amid disruption to Russian supply, following sanctions from various countries.

“However, the supply shortage wasn’t enough to slake the bearish mood dominating the metals market as the outlook for demand deteriorates.”

Aluminium is a commodity dominated by the big boys of the ASX, with South32 (ASX:S32), Alumina (ASX:AWC) and Rio Tinto (ASX:RIO) the key players.

The processing steps and energy intensity of the industry means there are tough barriers to entry and some smaller firms who have tried at the bauxite mining and shipping stage have run into headwinds during ramp up, notably Queensland bauxite exporter Metro Mining (ASX:MMI).

While urbanisation and industrialisation drive aluminium and alumina demand, Dhar says decarbonisation will increasingly become a large share of the market. An EV for instance requires 227kg of aluminium versus 164kg in a standard internal combustion engine vehicle due to both the replacement of steel and the need to lightweight EVs to increase their charge range.

“As EVs become a dominant share of the global passenger vehicle market, the transport sector is expected to drive aluminium demand growth this decade,” he said.

“The electrical sector (~12% of global demand) is expected to also grow strongly. Demand is underpinned by the rapid increase in renewable generation alongside the expansion of power transmission and distribution capacity.”

Aluminium stocks share prices today:

Who had news today?

The big iron ore miners have had a tough morning, sending the ASX materials sector down 0.84% in early trade.

Two winners stand out among the large and mid-cap resources stocks.

Rare earths play Australian Strategic Materials (ASX:ASM) was up over 20% after revealing the details of a revised framework agreement for a major equity investment in its projects from Korean bigwigs.

KCF Energy Co. Ltd, owned by the Korean Consortium looking to support ASM, has taken a US$15m equity stake at $8.90 a share, a ~56% premium to ASM’s last closing price of $5.68.

Cue the buying.

The parties involved in the deal will negotiate on a non-exclusive basis for investments in ASM, ASM Holdings, KSM Metals Co (the holding subsidiary for ASM’s Korean Metals Plant) and a 2800tpa, five-year offtake deal for the supply of neodymium-iron-boron alloy from the plant.

NdFeB is a key input in the permanent magnets used in EVs and wind turbines.

On top of that the investments ‘to be negotiated’ under the revised framework agreement include the Korean consortium, which will facilitate a strategic investor to acquire 10% of the shares in ASM Holdings for US$125 million, to make an additional US$105m equity investment in ASM subject to shareholder approval and invest US$50m via a convertible bond for a 30% stake in KSM.

ASM says the terms “provide flexibility for ASM to secure the right strategic partner for its Dubbo project”.

The original framework agreement in July last year would have seen the Korean consortium invest US$250 million for a 20% stake in the Dubbo project.

Meanwhile, assay technology play Chrysos Corporation (ASX:C79) has rebounded 11.6% this morning as it looks to recover from its disastrous ASX debut.

Chrysos announced agreements for the delivery of a further five PhotonAssay machines — thingamajigs that use X-ray technology to accurately scan gold and other metals grades in a fraction of the time of traditional fire assay — increasing its total contract value by $108.6 million to $559.8m.

The company now has 38 units contractually committed, the latest to head to Alfred H Knight, Britannia Life Sciences and Intertek.

It has also deployed new units to MSALABS and ALS to take its deployed base to 10, while one of the units committed to MSALABS will head to Barrick Gold’s Kibali mine in the DRC.