Aluminum futures volatility fuels uncertainty for the recycled metals market

The non-ferrous scrap market is seeing some interesting moves lately, especially with aluminum taking center stage in the LME. A lot has been happening with October aluminum futures, where prices were soaring earlier but have now dropped into a discount compared to November. This shift may largely stem from one of the big LME market participants, which had built up a hefty position in October contracts, possibly gearing up to take delivery of a hefty amount of LME warehouse metal. But now, with expiration coming up, those holding long positions are scrambling to sell, and the balance of power in the market is shifting as a result.

On top of that, an LME warehouse has conveniently (to them) hiked up their fees and has thrown a wrench into the LME delivery process, causing headaches for traders and making it harder to juggle futures positions. This comes at a time when global economic uncertainty is hanging over everything, with China announcing big stimulus moves, like selling bonds to try and jumpstart their economy, but the real impact of that on aluminum demand is still up in the air.

Secondary aluminum, as RMU reported back in Q2, is being increasingly used in manufacturing, particularly now in cables. While it’s clear this is happening among smaller producers, we might see this expand elsewhere, which could shift the demand patterns for aluminum scrap globally.

On the macroeconomic side, there’s a lot of uncertainty. Global growth was said to expect to pick up by 2025, driven by possible interest rate cuts, but the rest of 2024 looks slower, with central banks like the Fed being cautious about fueling more inflation. China’s property market is still struggling, despite efforts to prop it up, and that’s kept their real demand for metals soft.

Meanwhile, the LME aluminum price surged last week on the back of rising bauxite and alumina costs, thanks to Emirates Global Aluminum (EGA) halting exports from Guinea. This has pushed prices for raw materials up, impacting aluminum production costs. While Guinea’s bauxite production is still strong, any prolonged supply issues could tighten the market further.

Interestingly, reports from CRU show that China’s aluminum exports dropped off in September, down 5.4% from the previous month, mainly because of higher tariffs in markets like Canada and the U.S. However, year-to-date, exports are still up 15%, so this isn’t a long-term downturn yet. In addition, and completely opposite of U.S. EV consumer interests, China’s EV sales are surging, which bodes well for aluminum demand domestically, given the lighter materials used in EV manufacturing.

Amidst pricey futures, warehousing issues, global economic challenges, and rising raw material costs, all these factors are now collectively driving up aluminum scrap prices. If you are a trader or processor of aluminum scrap, you will want to track how these macroeconomic, supply chain headwinds play out as the recycled metal markets continue to see change.