For metals shipped in containers, the Red Sea conflict poses an upside risk. Container shipping is hardest hit by diversion, increased shipping times, shipping delays, and increased transportation costs.
Barely Half of the tonnage shipped across the channel is containerized goods., making it the most important artery for container trade. In the three weeks from mid-December, around 80% of container ships on the Suez route were forced to change course, a level that reached 90% in the first week of January (according to Clarksons). Market leaders MSC and Maersk have diverted more than 60 container ships around the Cape in just three weeks. Other larger container ships (Hapag Lloyd, Cosco, ONE, Evergreen, HMM and ZIM) have followed suit.
This is driving up freight rates, and container rates have already more than tripled. It’s also adding weeks to delivery times. Higher shipping costs will eventually have to be passed on to the final selling price of the metals.
For aluminum, this is bullish for prices, particularly premiums, rather than the LME price. Primary aluminum premiums in Rotterdam have increased by 10-15% since the beginning of December after months of decline, according to data from Fastmarkets.
LME forward spreads remain in wide contango, providing further support to premiums. The aluminum cash/three-month spread was last at $48.50 per ton contango. The Middle East is one of the key markets for Europe when it comes to aluminum sourcing and any disruption there is likely to support premiums.
Europe is heavily dependent on aluminum imports and nearby supply is limited. Disruptions in shipping occur at a time when Aluminum production in Western Europe is the lowest this century. Since December 2021, there have been several production cuts in Europe, representing 2% of the global total. Rising energy costs following Russia’s invasion of Ukraine have squeezed producers’ margins, with energy-intensive metals such as aluminum particularly affected.
Low premiums in recent months have also weakened incentives to ship material to Europe, leaving many in the aluminum market without reserves in case demand improves more than expected in the coming months.