Why are aluminium prices falling?

Aluminium for three-month delivery has declined from about $2,100 per tonne in the third quarter of 2014 to below $1,800 per tonne, the lowest since May 2014. The price on the London Metal Exchange (LME) isn’t what an actual buyer would pay though.

A buyer needs to pay a surcharge, or premium to obtain immediate delivery of the metal, one that currently amounts to $370 per tonne. Aluminium premiums are down by around 10-15% with many expecting them to tumble another 40-50% this year.

In February, China exported 420,000 tonnes of unwrought aluminum and aluminum products, more than double the amount exported in February 2014. Exports of aluminium semi-manufactured products is primarily structural in nature, a reflection of the country’s aggressive build-out of its own smelting capacity.

Strong growth in aluminium production in China, in excess of demand growth has resulted in an incentive to export aluminium, taking advantage of higher prices elsewhere.

An estimated 10-12 million tonnes of aluminium are stored globally but until recently the material has been locked away, it being used as collateral. This process involved selling aluminium forward to net a profit while leaving it in storage, reaping sky high LME premiums. Strong exports from China has put pressure on the aluminium price and premiums.

Finally, like many commodities the strength of the US dollar has put downward pressure on aluminium prices while lower energy prices have reduced costs for aluminium smelters.

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