FOCUS: Alumina market watches closely as LME aluminium price hits $1,900/t

As the aluminium price surges to an 18-month high, alumina market participants are debating how it is influencing the raw material's market direction.

The London Metal Exchange three-month price hit $1,913 per tonne on Wednesday November 4 - the highest since April 2019 - and closed trading at $1,908.50 per tonne at the LME 5pm ring kerb.
The aluminium price has been on an upward trajectory over the past month, climbing 8% since October 5.
Conversely, benchmark alumina prices have been relatively rangebound. Fastmarkets’ alumina index, fob Australia has hovered between $271 and $275 per tonne since October 13. The price settled at $273.24 per tonne on Thursday from $275.84 per tonne a week earlier.
“The aluminium price has been a big talking point amongst everyone. In my opinion it is supporting the market. If it wasn’t rallying, alumina prices would be a lot cheaper,” an alumina trader said.
Participants told Fastmarkets that the alumina market remains oversupplied with a number of spare cargoes available on a spot basis for December loading. Buyers reported being offered multiple different shipments from sellers, while buying demand from China remained weak.
“China aren’t interested in the moment which usually weakens the market and there are a few loose cargoes around but the aluminium price is counteracting it a bit,” a second trader said.
Throughout October, there was a good amount of spot liquidity since producers had excess cargoes to sell into the market. Within October, Fastmarkets collected over 375,000 tonnes of spot business for Western Australian alumina.
“The LME [price] is providing support; not necessarily pushing the prices higher but it is stopping it from dropping,” a producer explained. “The margin looks better and bullish sentiment in aluminium does trickle down the supply chain.”
A disconnect?
This week, the latest deal for alumina concluded at $274 per tonne on a fob Western Australia basis on Wednesday afternoon. Before this, there was a deal at $270 per tonne on a fob Vietnam basis. The buyer said there is a freight saving which would make the fob Vietnam cargo equivalent to $266 per tonne on a fob Western Australia basis.
Some alumina market participants who see lower achievable deals say the alumina market is disconnected from the aluminium market rather than supported by it.
“In a market where the LME aluminium price has been increasing… it was no surprise to us that alumina prices set to appear on a decreasing trend. It clearly shows the disconnect prevailing between both these markets,” a market source said.
“Our strong belief is that, alumina continues to be an oversupplied market, and therefore, correction [of alumina prices] is imminent,” the source added.
Historically, the alumina market was priced as a percentage of the outright aluminium price on the LME, but physical contracts have since changed to being based on price reporting agency indices because there can often be a disconnect between the aluminium prices and raw materials.
Currently the alumina index is at 14% of the LME three-month price. Historical contracts priced alumina at between 12% and 17% of the aluminium price.
“Aluminium can follow completely different fundamentals to the market; I didn’t expect aluminium to hit $1,900 per tonne this year but it doesn’t mean alumina should rise,” a third trader said.
The disconnect can also happen in the opposite direction. Throughout the historic rally in alumina prices in 2018, the three-month aluminium price remained flat, trading between $2,000 and $2,100 per tonne. On some occasions, alumina was trading at 30% of the outright aluminium price.
What’s behind aluminium’s climb?
The aluminium price has found support from a number of macro factors and rallied alongside the rest of the base metals complex.
“Since the second half of this year, LME aluminium has played catch up, fueled by a weaker dollar index, growing economic activity in China and the significant increase in liquidity (hot money) that is driving speculative fund positioning into a bullish frenzy,” Fastmarkets analyst Andy Farida said.
“It appears that the light metal has been able to shake off the macro uncertainty and its price action is already working its way higher,” he added.
There has been a long-standing argument that the LME aluminium price does not always follow its own market fundamentals and is more macro driven. 
Physical demand for aluminium has picked up in recent weeks but oversupply remains and premiums in key markets, such as Rotterdam, are under pressure.
Fastmarkets assessed the benchmark daily aluminium P1020A, premium, dp in-whs Rotterdam at $125-130 per tonne on Tuesday November 3, from $130-135 the week before and compared with a multi-month high of $135-140 per tonne between September 22 and October 13.
Fastmarkets research analysts expect a big surplus in the global aluminium market this year of 4.275 million tonnes, with much of the surplus in the world ex-China. It forecasts Chinese aluminium consumption to decline by only 0.9% year on year in 2020, compared with a decline of as much as 12.6% for the rest of the world.
But the futures price remains strong, following the rest of the complex including copper. The three-month aluminium price was most recently trading at $1,897.50 per tonne, consolidating recent gains while the commodities markets await the outcome of US presidential election.
“Aluminium’s micro dynamics remained price supportive for the futures market. Having had the largest bearish exposure in the first half of the year, short-covering as well as fresh buying interest have turned the complex around,” Farida concluded.

Alice Mason

alice.mason@fastmarkets.com

Published

Alice Mason

November 05, 2020

16:41 GMT

London