China’s objective is to have greater influence on global metals prices…as such, this might be a conducive time for China to participate in the global aluminum derivatives market.
Base Metals Prices Slide
Copper prices have been on a downtrend since 2013. Aluminum held out until November 2014, but has since also been on a continuous decline. Since the early 1990s, metals consumption in China had grown by 14% annually, while demand in the rest of the world grew at a meagre 0.4% — due, in part, to the offshoring of manufacturing operations to China. The offshoring mode has largely run its course. As new supply comes on, it will outstrip demand and this could force higher-cost manufacturing firms to close down.
Hard for Physical Players to Exit Market
Despite the supply glut, there is no easy way out of the sector for some. On the one hand, the Chinese government is under pressure to maintain domestic employment in these industries. On the other, Chinese traders are stuck with Take-or-Pay (ToP) contracts, and the surviving firms have to maintain production even if it means having to take losses on their exports.
Aluminum Flows are More Even Across Regions
China is self-sufficient in the production of primary aluminum. It is, in fact, a net exporter of unwrought aluminum, with US$1.4 billion exported versus US$0.7 billion imported in 2014.
Unlike copper, the American, European & Asian regions each have a fair market share of physical trade flows of aluminum. No country accounts for more than 13% of the import or export market. Japan, the largest importer in Asia, only has 11% market share of global aluminum imports.
The absence of a dominant aluminum hub in Asia might be the reason aluminum futures volumes are relatively light on the exchanges in China and India, and hardly traded on the exchange in Japan. Historically, aluminum derivatives trading has been concentrated in London.
Development of Regional Indexes for Aluminum
However, as large physical volumes flow in and out of Asia and North America, there needs to be some way to price the regional differences. Due to the lack of liquid physically-deliverable futures contracts in these regions, traders have turned to Price Reporting Agencies such as Platts and Metal Bulletin for price discovery.