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Aluminium futures price: Recession, soaring energy costs cool once-booming market prospects

By Nicole Willing

Edited by Jekaterina Drozdovica

14:05, 31 October 2022

close-up 3d rendering or illustration of shiny steel and aluminium profiles and metalware for construction and engineering in storehous
Recession, soaring energy costs cool once-booming aluminium market prospects Photo: iQoncept / Shutterstock

Aluminium futures prices have weakened in the past month after a record intraday surge in late September at the prospect of the London Metal Exchange (LME) banning metal from Russia. 

Aluminium prices have plummeted by 50% since March, when they reached record highs in response to Russia’s invasion of Ukraine. Falling demand from China, the world’s largest producer and consumer, has weighed on the market, along with the increasing potential for a global recession, US dollar strength and persistent high energy costs, which are driving up the cost of manufacturing.

What are aluminium futures, and what is the outlook for the market? Here we take a look at what factors are driving the price.

Aluminium futures explained

Aluminium futures are derivatives contracts under which the buyer agrees with the seller to take delivery of a specified quantity of aluminium metal at a fixed price on a set date in the future. 

Aluminium futures are predominantly traded on the London Metal Exchange, the Shanghai Futures Exchange (SHFE) and the Commodity Exchange (COMEX). Standard contracts are for quantities of 25 tonnes of metal. Contracts can be physically settled on the expiry date, when the buyer takes delivery of the metal, or financially settled, where the buyer transfers cash to the seller on the settlement date.

The LME’s aluminium futures contracts are considered the global benchmark. Traders can exchange contracts for daily periods out to three months, weekly out to six months or monthly contracts with delivery periods out to 10 years. The aluminium futures price for LME and COMEX contracts is quoted in US dollars per metric tonne, while SHFE contracts are priced in Chinese yuan renminbi per metric tonne.

Aluminium producers and consumers trade futures contracts to hedge their risk in buying or selling physical metal. Producers can lock in prices for their metal, while consumers can secure long-term prices for supply to provide some certainty and stability in their future costs. 

Commodities traders and investors use aluminium futures to try to profit from fluctuations in the market. They buy to speculate that an aluminium futures price will rise and sell when they expect the price will fall. 

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Aluminium price volatility rises

The aluminium futures market has been highly volatile in 2022 on uncertainty around supply and demand. The benchmark LME three-month aluminium price started the year at $2,823.00 per tonne and climbed to $3,445.00 on 24 February in response to the Russian invasion of Ukraine. The contract hit a record high above $4,000 on 7 March, on increasing concerns that Russian aluminium exports would become subject to sanctions.

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Aluminium 3-month price, January - October 2022

Russia accounted for 6% of global aluminium production in 2021 and countries including the US and UK have applied tariffs to imports of Russian aluminium products. There were concerns that Russian production would be affected by losing access to the raw material alumina from Australia for refining into aluminium metal, but China has increased its alumina exports to Russia to cover the shortfall.

China’s zero-Covid policy has seen aluminium demand drop as factories have closed for extended periods and the slowdown in the global economy has further reduced consumption. A strong US dollar has weighed on demand from buyers with other currencies, as unfavourable exchange rates have increased the cost of the metal. 

According to the report by Commodity Futures Trading Commission, soaring energy costs reduced aluminium production in Europe by 11.5% in the first half of 2022, but have also reduced other manufacturing activity, in turn reducing demand for the metal.

The three-month LME aluminium price fell over the summer and reached $2,103.00 per tonne on 28 September. The price ticked up to $2,360.00 on 6 October in response to the release of an LME discussion paper that proposes suspending Russian metal from its warehouses. But the price retreated after the initial market reaction, trading down at $2,175.50 on 21 October. The market closed at $2,236.00 on 28 October.

Aluminium futures price outlook

Will the aluminium market rebound or remain under pressure? The aluminium futures forecast from Trading Economics, as of 31 October, estimated that the metal could fall back to $2,154.44 per tonne by the end of 2022 and drop to $1,991.90 in a year, based on analysts’ expectations.

However, analysts at Capital Economics were bullish in their prediction, expecting prices to rise towards $2,400 per tonne, noting:

“As the global economy tips into recession, aluminium demand growth will remain weak next year. However, we think supply growth will be even softer, pushing stocks lower and the price higher.”

If you are considering trading aluminium futures, we recommend always conducting your own research as analyst views can be wrong. Look at the latest market trends, aluminium futures news, technical and fundamental analysis, and expert opinion before making any trading decisions. Keep in mind that past performance is no guarantee of future returns.

FAQs

Why is the aluminium price dropping?

Aluminium prices have fallen from record highs seen in March as concerns about falling demand from China’s zero-Covid policy and the prospects for a global recession have outweighed the impact of the Russia-Ukraine conflict.

What determines aluminium futures prices?

Aluminium prices are driven by supply from the world’s largest producers and demand from manufacturing companies that use the metal in their products.

How can I invest in aluminium futures?

Aluminium futures are predominantly traded on the London Metal Exchange (LME), the Shanghai Futures Exchange (SHFE) and the Commodity Exchange (COMEX). 

Standard contracts are for quantities of 25 tonnes of metal. Contracts can be physically settled on the expiry date, when the buyer takes delivery of the metal, or financially settled, where the buyer transfers cash to the seller on the settlement date.

Markets in this article

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Aluminium Spot
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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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