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Aluminium price rise stalls, but Covid in China still presents upside risk

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Aluminium prices have come down slightly from their peak of over $4,000 a tonne in early March but while the effect of Russian sanctions may be fully priced in now, the brewing next wave of the Covid pandemic in China could create a renewed signal for a push higher.

The benchmark London Metal Exchange three-month aluminium futures have gained 3.8% over the last week to trade at over $3,420 a tonne with prices trading in a relatively narrow range of $150/t.

The war in Ukraine had provided the impetus for the rally in late February and March, with every sanctions decision pushing aluminium prices a little bit further. But unlike some other metals, there is a limit to how high aluminium prices can go because of sanctions on Russia.

To start with, in the first four waves of sanctions the restrictions included banks, individuals, the financial trading system, oil and gas, and in the latest move also Russian steel. But up until now, the Russian base metal industry has not been put on the sanctions list. While this is not a guarantee that Russian metal production will not be sanctioned in the future, what happened with the previous set of sanctions in 2018 is fairly telling.

Russia is not only the world’s fourth-largest exporter of aluminium but more importantly plays a key role in supplying the US metals industry. Russia’s biggest aluminium producer Rusal exported nearly 4 million tonnes of aluminium last year, half of that to the US and the EU. In 2018 when the US sanctioned Russian oligarch Oleg Deripaska, the owner of Rusal and a Kremlin insider, prices spiked 40% overnight causing a world of pain for US buyers who ended up lobbying the US Treasury Department to relax sanctions on Rusal. They succeeded within a matter of months and by January 2019 the Treasury Department completely lifted sanctions on Rusal (while keeping sanctions on Deripaska personally). These are the only sanctions that have been withdrawn since the annexation of Crimea in 2014.

Chinese production of aluminium

The bigger unknown for the aluminium market is how will the latest Covid wave in China affect the country’s domestic production? In early February prices spiked when parts of Guangxi province ended in a strict lockdown, including the city of Baise, one of China’s top 10 metal producing cities. Since then restrictions in Baise have been relaxed but as Covid is spreading across southern parts of China in the worst COVID outbreak since the virus first emerged in Wuhan, restrictions on movement and cargo transport are once again kicking in.

There has been some panic buying in Chinese markets causing aluminium prices in Shanghai to rise by more than 3% on Friday. If China opts for as strict restrictions as in the early waves of Covid these could start affecting not only metal production but also distribution across China. China’s primary aluminium production last year rose to 38.5 million tonnes (despite issues with higher energy prices which capped some of the planned output expansion) as the country’s production nearly doubled in the course of the last decade.

WisdomTree Aluminium ETFs

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Aluminium
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KXN58 ALUM USD
WisdomTree Aluminium 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | EQi
JE00B2NFTC05 LALU USD

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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