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A curious tug of war continues in the Aluminum industry. It remains focused on likely demand destruction due to recessionary forces, generally blamed on central banks’ rapid raising of interest rates. Of course, we’ve all watched base metals come off sharply since the end of Q1, and Aluminum has been no exception. Indeed, after peaking at more than $4,000 per ton in late March, Aluminum prices now hover in a range of $2350 to $2450.
On the other hand, supply shows increasingly showing signs of distress. This remains most noticeable in Europe, where a string of primary Aluminum smelters and alumina refineries have been partially or fully closed due to massive rises in power costs. It’s worth noting that high power costs are usually supportive of aluminum prices. However, due to the market anticipating further supply disruption as power costs undermine smelter economics, the recent power cost surge hurt Aluminum markets globally. According to the FT, power costs are expected to remain high at least into 2024. The organization recently confirmed this prediction by citing the levels at which consumers are fixing forward prices for natural gas.
Russia’s War Lies at the Heart of European Anxieties
The Financial Times post also reveals that the price of gas being delivered to Europe at this time of year in 2023 and 2024 neared its highest level on record. Currently, the projections are at €134 and €82 per megawatt hour. This represented a stark change when compared to the last decade when European gas prices traded consistently below €40 per MWh.
Some might remember how natural gas prices started rising last year. Most of this was due to Russia restricting supplies over “depleted inventories” and “maintenance issues.” In hindsight, it’s clear the move was a prelude to the invasion of Ukraine. The intention was most likely to run European inventory levels down and heighten the sense of panic in European capitals. Of course, that’s exactly how it has played out.
Meanwhile, Germany is leading the EU in proposing the rationing of natural gas to industrial users. However, the country has experienced a lot of push back from states like Spain and Portugal. These countries are not so dependent on Russian gas, and they feel they’re being asked to make sacrifices for the sake of those who allowed themselves to become so dependent on cheap Moscow oil supplies.
Aluminum Prices, Energy Woes, and Europe’s United Front
The US has had its fair share of metal supply issues. However, the resumption of production at Canadian smelters has put the Americas in a relatively more stable supply position. Back in Europe, the tightness of natural gas supply and government threats of rationing remain an existential threat to consumers relying on pricing and metal supply this winter.
In fact, Europe’s anxiety over gas supplies remains so high that it’s already beginning to unravel the previously robust and unified response to the war in Ukraine. As self-interest begins to overcome outrage at Russia’s unprovoked attack, differences in opinion are starting to wedge gaps between states.
Of course, Italy’s political meltdown following the resignation of Mario Draghi this month was not a direct result of the conflict. Still, how the EU’s third-largest economy will respond to threats of gas rationing does not bode well for Europe’s unified front. This will prove especially true if the country embraces more right-wing politics in the next round of elections as expected.
By AG Metal Miner
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