Summer is officially here. Memorial Day is in the books, kids are on summer break, and the warmer air has the aroma of freshly cut grass. The temperatures aren’t the only thing on the rise, metals have been on a heater in May!
Copper set an all-time high at $11,104.50 and while we have drifted back a bit, we’re still in ranges not seen since the 1st half of 2022. Copper is used extensively in construction and energy applications and speculators have been betting on a long-term shortage of the metal as the world moves toward green energy. Aluminum, used for some of the same applications, usually lags behind the red metal in commodity rallies but did come around and hit 2-year highs late this month as well. Year to date, aluminum is up 15% while copper has risen 20%. Some analysts foresee a continued inflow of money into metals, meaning pricing support may persist but the biggest obstacle I see is demand. China, the world’s largest metal consumer, remains sluggish and the US (like many other countries) are still fighting sticky inflation with elevated interest rates and sapping economic growth. Remember when experts were calling for multiple interest rate decreases in 2024 with some as early as March? Yeah, those didn’t pan out and we’ll be lucky to see a single rate decrease before the end of the year.
The base metals landscape is ever-changing with various sanctions, policies, tariffs, and duties. With these changes come opportunities to manipulate the new regulations. A perfect example of this occurred late April/early May. In response to the blackballing of Russian made metals manufactured after April 13, 2024, traders gobbled up Russian branded aluminum that was on warrant in LME warehouses but produced before the 4/13 date. By taking the material off-warrant, subsequently cancelling, and delivering back to an LME warehouse, those same units (which previously had no restrictions) would fall under the much stricter trading conditions forcing them to remain in the LME system for extended periods of time. The goal of all this was to generate steady revenue streams for the warehouse operator as well as the entity re-warranting it (through rental-share agreements). This gaming and manipulation of the new rules resulted in elevated pricing and a short term backwardation. The LME has since closed this loophole by allowing re-warranted material that was produced before 4/13 to retain its original free-trade status but this might not be the end of the story. There has been an abnormally high amount of cancellations over the past 45 days that could be another “play in the works” and there is always the risk off-warrant inventory that was produced before the cutoff date (estimated at nearly 800,000 tons) will move into the LME warehouses. All this underscores the divide that exists today between true supply/demand and market pricing.
There were a few other significant tariff announcements in May. Section 301 duties increased on Chinese manufactured aluminum sheet, plate, and foil meaning these aluminum products will see duty increases from 7.5% duties to 25%. This impacts roughly 400 million lbs of imported aluminum annually. The Department of Commerce is also removing many Section 232 automatic tariff exemptions as of July 1 which will increase duties on extrusion imports (320 million lbs last year) and slab imports (~75 million lbs). While these announcements won’t impact LME or MWP, they will definitely increase demand for locally manufactured aluminum and push conversion premiums for these products up. Good thing we have one or two (or 15) new casting and recycling facilities coming online over the next 3 years!
Short term, the impacts of these tariffs will be muted given the economic sluggishness being felt domestically, but come late 2024 or into 2025 when interest rates start to retreat, they will be felt.
Ramped up domestic aluminum that displaces imported material will only continue to stress the US scrap market and keep spreads tight. Remember, shifts like this don’t impact the amount of domestic scrap but increase the local appetite for scrap.
Please contact me with feedback, ideas for future topics, or offerings on aluminum scrap. I can be reached at 440-813-6325 or michael.anderson@schupan.com.
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