(Bloomberg) — Aluminum edged higher as investors assessed the potential for long-term supply limitations despite booming Chinese production and the possible return of Middle East smelters to the global market.
The metal gained 0.3% to settle at $3,388.50 a metric ton on the London Metal Exchange. It’s still down since the US-Iran agreement was announced over the weekend.
This week’s decline is largely a response to the prospect of the Iran deal, which offers a pathway, although uncertain, for the Middle East’s substantial aluminum industry to recover output. But while the Iran war has roiled trading for months, a quieter effort in China to put smelters into overdrive has also become a key talking point and risk.
Production of primary aluminum hit a fresh monthly record in May, according to China’s National Bureau of Statistics, potentially weighing on prices if sustained. Annualized output of the first five months of the year has reached 46.5 million tons — significantly above a government-imposed cap on annual capacity at about 45 million tons.
“Old smelter capacity is being replaced by more energy efficient technology and the industry as a whole should be able to produce more aluminum on the same amount of energy,” David Wilson, senior metal strategist at BNP Paribas SA, said in an interview.
Still, analysts in China say there’s not that much room for further growth beyond this year. Most of the possible efficiency gains have already been implemented over the course of the last few years.
There has also been a renewed government drive to inspect energy use and efficiency, which may also impinge on output. Smelters in Guangxi, a key production hub, have already been forced to trim production, and output in May was down slightly on a daily basis versus April.
“The broader message is consistent: China’s aluminum system is operating at historically elevated utilization levels with limited remaining supply elasticity,” Citigroup wrote in a note last month.
Aluminum ends up in very disparate corners of global manufacturing — from cars to drinks cans and power equipment. Global buyers have faced higher costs since late February, when smelters in the Middle East were effectively cut off from the global market. China’s rising output and exports have offered some relief, taking some of the edge of the global supply shock.
Analysts say that firms in China have engineered their smelters, especially more modern ones, to produce beyond the “nameplate” specifications used by authorities. As a result, plants can run at several percentage points above their notional maximum.
China’s imposed its aluminum capacity cap last decade to curb power usage and carbon emissions linked to the highly energy-intensive industry. But only now is the cap’s true flexibility being tested and scrutinized by investors globally.
There may be other factors allowing elevated production. For example, analysts at Citigroup Inc. have also pointed to potential production overlaps as companies fire up new replacement smelters before old ones have been fully halted.
Other base metals on the LME were mixed, with copper up 0.2% while zinc was down 0.6%.
–With assistance from Kanupriya Kapoor, Jason Rogers and Yvonne Yue Li.
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