Since late 2019, China has been hoovering up aluminium to feed its apparently insatiable appetite from its downstream products sector. This has been partially spurred by the rapid bounce-back from the initial Covid-19 lockdowns, along with the country’s increasing difficulties powering ever-expanding primary production capacity amid the imposition of energy efficiency targets.
As a result, demand for aluminium outstripped domestic supply and saw the country transition to a net importer of metal.
The gravitational pull of China saw a
reconfiguring of supply flows and the migration of significant stocks to Asian
warehouses, particularly in Malaysia, to be in closer proximity to the market
that mattered. This configuration may be starting to change—China returned to
being a net exporter in February 2022, shipping ~26kt over the month, the
highest monthly total since 2010.
This represents a significant reversal from
the massive volumes imported over 2020-2021 when the country’s domestic supply
struggled to keep up with its demand. Imports for January and February in 2022 are
down 76% from the corresponding period last year.

A supply crunch in Europe—as soaring
energy prices force regional capacity curtailments—with both the Europe
benchmark price and physical premiums rising has largely driven the shift back
to China’s exports. Of note, China has not generally exported much primary
metal since a 15% export tax was imposed in 2006.
In addition to the primary aluminium
exports, an acceleration in the flow of semi-manufactured products out of China
and into Western markets has also been noted. The export of ‘semis’—to avoid the
export tax—have historically caused significant concern to producers outside
China and has seen extensive anti-dumping duties brought in to protect domestic
markets. Though with the cost of producing locally, both prices and premiums
breaking records and visible stocks in apparent short supply, the world could
currently be relying on China to fill the gap.
The Argy-Bargy of Arbitrage
Exports have also been induced by the
rapid rise in the Europe price vs. movement in the China index since the start
of 2022, with the arbitrage now favouring Chinese exports.

The emergence of an export-favouring
arbitrage between Asian and European markets is likely to incentivise further
shipments in the short term. The export of aluminium products from China, as
opposed to primary metal, is even more likely to rise as they avoid the 2006
primary metal export tax as well as benefit from a VAT refund.
While the export
of semi-fab products fell in 2019 and 2020, due to a combination of robust
domestic demand and increasing tariff barriers, volumes returned to form in
2021. The price arbitrage is expected to see continued growth in semis exports—returning
to preference over primary exports due to their favourable domestic tax
treatment.
Increased exports from China are driven by
supply shortages elsewhere—particularly Europe—coupled with the return of
production capacity in China idled over winter amid energy efficiency
initiatives as well as the ramp-up of new capacity which had been delayed amid
the energy shortages.
Exports may receive a short-term sugar hit as China’s
domestic demand takes a hit as it continues pursuing a quixotic zero-covid
strategy. Given shortages elsewhere, the usual protectionist outcry from receiving
countries may be muted, particularly as they start looking for alternate
sources as questions are raised over continued supplies from worlds latest
pariah state, Russia—a key part of the European supply chain.
Don’t Mention the War
The Russian invasion of Ukraine has exacerbated
supply issues in Europe, pushing already soaring energy costs in the region
even higher, with already struggling smelters feeling the pinch and forcing
further curtailments amid already constrained supply. With supply in the region
constrained, consumers in Europe will be looking to external sources.
While Rusal itself, Russia’s sole
producer with around 4Mtpa of capacity in the country is yet to be sanctioned,
significant uncertainty remains over the continuation of supplies from the
country. While not directly sanctioned it is facing secondary sanctions, most
notably accessing Australian alumina exports—compounding its alumina supply
issues with its own 1.7Mtpa Nikolaev refinery in Ukraine out of action. Western
consuming companies are also self-sanctioning as they try and limit exposure to
Russian producers.
The wider status of Russian aluminium as
a tradeable commodity is also uncertain. An announcement at the start of April
that the LME was suspending the warranting of Russian primary aluminium and
aluminium alloy in LME-listed warehouses in the UK creates an added avenue of
uncertainty—though UK warehouses have recently held little, if any, stock. The
move follows the UK announcing additional duties of 35% on Russian material
from the 25th of March.
The gap is likely to be filled by the
surplus material coming out of China. Though logistically less ideal, if
Western consumers are committed to avoiding Russia that’s where available
production to severely supply constrained Europe is going to have to come from.
However, this may impact the availability of increasingly desired low-carbon
aluminium products—with the majority of Rusal’s production made using
zero-emission hydropower. Replacement with material from still coal-reliant Chinese
sources may not be considered an acceptable swap.
A
Potential Middleman
Will China also be able to provide an
outlet for the unwanted Russian aluminium? China has been hesitant to come out
strongly against Russia’s activities in Ukraine, underpinned by their unlimited
forever partnership. It is possible that China could act as a buffer, buying aluminium
from Russia and continuing to export semi-fabricated products. Historically,
exports of primary aluminium to China from Russia have been relatively small—we
could potentially see volumes increase.
Despite sanctions initially not hitting its
commodity flows directly, Rusal may also have an emerging issue securing
sufficient alumina supplies for its primary aluminium production capacity—though
is unlikely to find much immediate assistance from China in this space.
With
Russia flattening Ukraine, forcing the suspension of operations at Nikolaev,
and Australia banning alumina exports to the country—a de-facto sanction on the
company—Rusal is starting to feel a squeeze to its ability to feed its smelting
capacity. China is not self-sufficient in alumina for its own smelting capacity
but may eventually increase imports, passing volumes through to the Rusal
smelters in Siberia.
The unfolding events in Eastern Europe and
their impact on commodity markets and the broader economy will remain a focus
along the aluminium chain, dictating short-term developments and narrative.
In
the background China, by far the world’s largest producer and consumer, will
continue doing its thing. Should Russia continue to be shunned or placed under
additional sanctions, trade flows of aluminium materials into and out of China
will no longer tell the full story as the country may find itself in a position
to take advantage of a constrained Russia.