Shortage of aluminium in Europe causes regional prices to shoot up

A catastrophic scarcity of aluminium in Europe has caused regional prices to skyrocket, presenting chances for commodity traders who have pounced on once-in-a-lifetime opportunity to profit by exporting metal from warehouses 6,000 miles away. According to two persons aware of the cargoes, some significant trading firms have lately loaded aluminium from Malaysia's Port Klang into break-bulk boats bound for Europe. It's a trade that would normally be extremely unprofitable, but the high expenses are mitigated by the higher prices that European purchasers are prepared to pay for metal.

Another indicator that European customers are running out of one of the world's most commonly used industrial commodities is the unique trade flow. Stockpiles throughout the world have declined considerably, and exchange inventories in Europe have hit new lows, while output in the area has fallen as smelting margins have been squeezed by rising power prices.

“If I was a trader I’d be looking to move material into Europe at the current time. I think we’ll see Port Klang empty a bit,” said Colin Hamilton, managing director for commodities research at BMO Capital Markets.

Even before the Ukraine tensions contributed to the uncertainty, prices were rising due to a scarcity of supply. Russia's exports account for approximately 4% of world output, and the prospect of shipments being slowed by prospective sanctions is fuelling the surge. On Tuesday, aluminium hit a new high of $3,380 a tonne, just missing a record high.

Many experts and traders believe officials will not directly target Russia's aluminium industry, especially after US sanctions against United Co. Rusal International PJSC caused market upheaval in 2018. However, sanctions on Russia's financial institutions might hamper aluminium supplies, while a cut in gas exports would pose enormous issues for European manufacturers already dealing with rising energy costs.

“At this time I don’t expect we’ll see sanctions that would roil the market, simply because of the lessons learned in 2018. That being said, this is a serious and fast-moving situation,” said Mark Hansen, CEO of London-based trading house Concord Resources Ltd.

With demand so high, any more supply delays would be devastating to firms that are already paying exorbitant rates for spot metal. Aluminium is used in a wide range of daily things, from beer cans to iPhones and automobiles, thus its influence is seen all around the world. For the time being, Port Klang, as the largest aluminium storage site in the London Metal Exchange's worldwide network, is offering an unusual lifeline for customers throughout the world as reserves run out. This is a significant shift in the warehouses' role, which had previously acted as a dumping site for the industry's excess metal.

Nonetheless, the Malaysian supplies may not bring much long-term help. According to the two dealers engaged in the deals, the economics of moving metal over vast distances may soon dwindle, and logistical constraints mean aluminium is leaving the port at a slow rate. The next bulk vessel leaving Port Klang won't arrive until June, according to the dealers, who asked not to be identified owing to the deals' commercial sensitivity. There are often long lines to remove metal from the port's exchange warehouses.

Financing the cargoes is also becoming difficult as spot aluminium prices rise above LME futures, resulting in backwardation, which might result in hedging losses while the cargos are in transit. Brokers who are waiting to remove metal from LME warehouses in the port may opt to deliver it back in when the backwardation rises, traders added. Beyond the short-term respite that the Port Klang stockpile may bring, the longer-term challenge for consumers and dealers is how the increasing shortages will be resolved.

Traders and banks like Trafigura Group and Goldman Sachs Group Inc. have cautioned that more price increases may be necessary to encourage new supply. However, with rising raw material costs putting pressure on manufacturers, worldwide shortages may likely be relieved by a drop in demand, posing hazards to both investors and physical traders.

“Because of the backwardation, I think every ton that can move to satisfy that demand has moved already. At the same time, it’s also very difficult to look at prices and premiums today and say this looks attractive from a risk-reward perspective,” added Concord’s Hansen.