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.