TOKYO — Aluminum’s worldwide rally could be near its end as China boosts exports of the metal not needed at home amid the nation’s massive production capacity.
Charting the rise
An upswing in the Chinese futures market led this increase. Prices for steel materials such as iron ore and coal have been climbing for some time in China. Speculators are now racing to close short positions in aluminum as well, anticipating greater Chinese infrastructure investment and construction demand.
“Funds are flowing into nonferrous metals from the overheating real estate market,” among other sectors, said Shinya Ikezaki, chief trader at Japanese trading house Mitsui & Co.’s LME department.
Hopes also are high for aluminum demand in the U.S., as President-elect Donald Trump has promised massive infrastructure investment. In addition, American automakers have been developing pickup trucks using lightweight aluminum alloys since last year to help meet tougher fuel-efficiency standards.
‘Crumbling’ relationship
But a closer look at China, the world’s leading aluminum producer and consumer, shows dimmer prospects for the market overall. The strength of the nonferrous metals market and the country’s rapidly growing gross domestic product have been tightly correlated over the past 20 years. However, this relationship “is crumbling,” said Takayuki Homma of Sumitomo Corp. Global Research.
This change could be linked to an overexpansion in production capacity as well as a surge in real production, particularly in aluminum. Sources such as the Japan Aluminium Association estimate global output of the metal exceeds 50 million tons annually. China accounted for 30.8 million tons of output in 2015. Yet aluminum production capacity in that country is thought to have crossed 40 million tons in the past five years, according to an official handling bullion at trading house Marubeni.
The global market is paying the price for this capacity boom. China produces more aluminum than can be consumed domestically, and the country exports to destinations such as the U.S., Europe and Southeast Asia in the form of aluminum products to avoid import tariffs. In 2015, China sent a record 4.76 million tons of aluminum overseas, including bullion, alloys and more processed products. Exports totaled 3.82 million tons in the first 10 months of 2016, and recent weakness in the yuan could fuel further shipments.