Do you know where the city of Pais is located? This question was not asked within the Ramadan competitions, where competitors compete to win prizes, although it is certain that if it was asked, it would be difficult for many to answer.
However, the city of Pais suddenly and without warning became the focus of many people’s attention, especially from those who deal in the metal market.
Pais is a small, little-known city located in southern China, near the border with Vietnam. Although the city has a population of only 3.5 million, it is nicknamed the “aluminum capital” in southern China, as it is a center of ore mining and metal production. Its annual production is about 2.2 million tons of aluminum, which is more than 80 percent of the production of China’s Guangxi region, which is the main alumina ore production region in China.
It seems normal until now, as the city, in short, is famous for the production of an important and necessary metal for the production of many main commodities, such as cars and consumer products, in addition to its heavy use in building and construction operations.
But last February, the attention of the world’s leading industrialists turned to the Chinese city of Pais, to follow its news hour by hour and moment by moment. As for the reason for the interest, China closed the city for a week.
One week of closure was enough to raise aluminum prices worldwide to the highest level in 14 years, and the reason for the closure is due to China’s adoption of a zero-sum strategy towards the Corona epidemic, that is, closing any city where a limited number of Corona epidemic infections are monitored among its residents.
Although Pais had no more than 190 cases of the virus, the Chinese authorities implemented a strict closure of the city, and imposed restrictions on travel and movement, which sparked panic in global markets with a gradual reduction in aluminum supplies coming from China, the largest aluminum producer in the world. .
The closure of the Chinese city of Pais was not the only reason behind the rise in aluminum prices globally. The Russian-Ukrainian war reflected on the prices of the metal and pushed it higher, so that aluminum became the most exposed major industrial metal in the market.
The sanctions imposed on Russia have raised fears that Russia, the sixth largest aluminum producer in the world, will resort to measures that restrict its exports to influence the markets, taking into account the repercussions that could affect many international strategic industries if the Russian company Rusal stops production, as it The largest aluminum producer in the world outside of China, it produces the equivalent of 6 percent of global production.
In turn, he told The Economist, Adam Arthur, an expert at the Metal Exchange in London, “The size of the global aluminum market was estimated at about 164 billion dollars in 2019, and it is expected to reach 242 billion dollars by 2027, with an annual growth rate of 5.7 percent, and although exports of Russia’s aluminum is relatively stable so far, prices have risen sharply, and most expectations are that they will continue to rise in the coming period.”
Regarding the reasons for this, he added, “There are several reasons. Traders fear that exports from Russia will be affected if the United States and its allies increase the size and scope of the sanctions imposed on it. A more effective reason and plays the main role in increasing aluminum prices, as aluminum production requires a lot of energy, and we are witnessing a rise in energy prices due to the Russian-Ukrainian war and the American, European and British sanctions on Moscow.”
He stresses that even before that war, when gas and electricity prices rose in both China and Europe in the second half of 2021, it became increasingly unprofitable for aluminum producers to continue to operate their smelters, so production fell at a time when the global economy was on the way to recovery and was There is an increase in the demand for aluminum, and the supply of aluminum around the world has fallen from very high levels during the Corona epidemic to its lowest levels now in about 15 years, which is why prices have risen sharply.
On her part, Dr. Vera Hudson, professor of international trade at University College London, does not deny the impact of the above-mentioned reasons for the rise in aluminum prices, but she points to another set of factors that may have played a prominent role in the current turmoil in the market.
She says, “Most industrial metals entered the current year on a strong basis, despite the presence of confusion in the general scene, as nickel fell by more than 2 percent at the beginning of the year before it made huge leaps due to the Russian-Ukrainian war, but it can be said that aluminum was the winner. The largest, producers on the European continent have been suffering since the beginning of the year from high energy costs, and there does not seem to be any sign of a quick solution to this problem, and it will be difficult for European aluminum companies to secure energy at competitive prices.”
“As for Asian companies, Indonesia’s ban on coal exports has created a turning point in regional energy markets, and some countries that are major buyers of coal from Indonesia and at the same time aluminum producers are in a difficult situation,” she added.
Some experts believe that the current rise in aluminum prices will have future, but not immediate, repercussions, as most industrial companies that use aluminum tend to hedge, and often have stocks for a sufficient period, but as prices continue to rise, producers will have to pay more whether to buy their needs of aluminum at the new prices, or to seek to restore the stock to its normal state, which means that the prices of most commodities that use aluminum will rise in the future.
However, Lauren Alex, an investment expert, believes that the problems arising from the rise in aluminum prices are complex, because they clearly overlap with problems of another kind.
She told Al-Eqtisadiah, “For the auto industry, the rise in aluminum prices is a problem that falls within the supply chain problems that it will have to deal with, and the industry can bear the high costs to a certain extent, but if aluminum prices continue to rise, manufacturers will only have to Transferring the cost increase in whole or in part to the consumer. In short, inflation rates will continue to rise.”
In fact, the current picture in the aluminum market appears to be in the interest of producers rather than consumers. Approximately 67 million tons of aluminum are produced in the world annually, about half of which comes from China, and during the past six months prices have risen by about 24 percent, and the price of a ton has exceeded $ 3,460 per ton on the American stock exchange.
Data issued by the London Metal Exchange indicate that aluminum stocks in the warehouses approved by the exchange have shrunk to less than 850 thousand tons, the lowest level since 2007. It is considered as the last resort for international markets, which is a clear indication of the overall lack of supply in the markets.
In turn, SD bets. Alker, one of the speculators in the London Metal Exchange, stated that prices will rise in the future, especially with the expected drop in global supply by about one million tons this year, and the persistence of shipping bottlenecks that make it difficult to transport aluminum to areas that need it.
He told Al-Eqtisadiah, “Theoretically, the recovery of Chinese production could enhance global supply and reduce prices, but this is unlikely for several reasons. First, China has an interest in higher prices, as Chinese companies achieve greater profits, at the same time China’s reduction in production is accompanied by The desires of the political decision-maker to put an end to aluminum production to control carbon emissions, especially since this comes after years of expanding production that led to low prices for a long time.
He added, “Also, under the sanctions imposed on Russia, it will not be able to maintain its current production rates, and most likely it will decline.”
Most current estimates indicate that aluminum prices may exceed four thousand dollars per ton this year, especially since the nature of the industry and its heavy dependence on energy makes it unlikely that factories that have closed in Spain or reduced production in places such as Montenegro, Romania, France and Slovakia will return to normal. For production, which means that the upper hand of aluminum producers and their dominance in the market will continue throughout this year.