As we saw in the previous part of this series, the United States has launched a formal complaint with the WTO (World Trade Organization) over alleged subsidies received by Chinese aluminum producers. In this part, we’ll see what trade action against China could mean for aluminum prices.
The steel price rally
US flat rolled steel prices rose an impressive ~70.0% in the first half of 2016 after trade duties were imposed on imports from countries such as China and Korea. However, the impact may not be the same for aluminum.
Aluminum prices are more global in nature than steel prices. US steel prices are generally among the highest in the world. After duties were imposed on steel products, US steel mills got the pricing power to raise their base selling prices.
Aluminum prices are decided on exchange trading. Globally, they’re linked to LME (London Metal Exchange) reference prices. So US aluminum producers can’t arbitrarily increase their selling prices. That said, it doesn’t mean there won’t be any impact if duties are imposed on Chinese aluminum producers.
Except for China, global aluminum markets have been in a deficit. It’s mainly due to capacity curtailments that producers such as Alcoa (AA) and Century Aluminum (CENX) have undertaken over the last few years. However, capacity curtailments by aluminum producers outside China (RIO) (NHYDY) haven’t had the desired effect. Chinese exports have risen steeply over the last few years.
Although we’ve seen some moderation in Chinese aluminum exports in the last year, they still remain high enough to pressure aluminum prices (DBB). If we see further moderation in Chinese aluminum exports as a result of a trade action, it should support aluminum prices.
In the next part, we’ll look at the key drivers of Chinese aluminum exports.