Explained | Why aluminium prices have soared sky high

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Aluminium prices surged to a 13-year high of $3,000 a tonne as sharp fluctuations in economic activity during the pandemic have amplified the impact of supply glitches and rising demand.

Policy action by China has also inflated the price of aluminium, the second most used metal in the world after steel. Moneycontrol looks at the factors that have hoisted aluminium to a new high.

Price Movement

Aluminium prices have been rising steadily since the beginning of 2021 but in the past three weeks, the metal has become about 14 percent more costly, and touched $3,000 per tonne, the highest since 2008.

This year, aluminium prices have risen about 50 percent, which is a matter of concern even for some producers of the metal. When prices were about 10 percent lower in the beginning of September, The China Nonferrous Metals Industry Association said the price surge was “irrational”.

Rising Demand

Economic recovery, helped by stimulus packages in various countries, has helped increase the demand for various metals, including aluminium. Analysts say, economic activity has increased significantly in Asia, the biggest consuming region for the metal, led by China’s increasing appetite, while Europe and the United States’ economies are recovering well, and likely to maintain growth with the help of supportive policies.

Demand is rising from various sectors such as packaging, construction, electrical equipment and products like beer cans. The automobile industry has also been increasing the use of aluminium to reduce the weight of cars, and achieve higher fuel efficiency as the metal is up to 65 percent lighter than steel, apart from being strong and recyclable. It is also used heavily in electric vehicles, which have reported strong growth in sales even during the pandemic.

Supply Concerns

The aluminium industry has suffered from excessive capacity for many years, but this year the supply has been tight. Earlier this month the price of aluminium ore bauxite jumped because of uncertainty after a coup in Guinea, which is the world’s second-largest producer of the ore, and a major supplier to China. Concerns over bauxite supply had an impact on aluminium prices also.

According to a Reuters report, aluminium inventories in LME-registered warehouses have fallen 33 percent since March to 1.3 million tonnes, and stocks in Shanghai Futures Exchange (ShFE) stores have slumped 42 percent to 228,529 tonnes since April.

The market was also rattled by supply disruption in alumina, which is made by refining bauxite and used to make aluminium. In August, a fire forced a large bauxite refinery in Jamaica to shut down, creating ripples in the market, and helping aluminium price rise further.

The China Factor

Aluminium production uses a lot of electricity supply, which was disrupted in China’s Yunnan province because a drought hit hydropower supply.

Provincial authorities in Yunnan, which has 10 percent of China’s aluminium capacity, have restricted aluminium production in plants that use hydroelectricity for smelting. Authorities have asked producers to make sure that the monthly output from September to December does not exceed the production in August.

The restriction has a far-reaching impact on the aluminium market because Yunnan was expected to provide about half of the growth in global aluminium supply in the next few years.

China’s efforts to reduce its carbon footprint is also an area of concern for aluminium producers because the majority of them depend on dedicated coal-fired plants for electricity supply.

Outlook

Analysts expect the bullish trend in aluminium prices to continue as economic recovery accelerates in many parts of the world, while supply is not likely grow at the same pace.

According to Goldman Sachs, prices of various commodities would keep rising as various countries take steps to cut emissions. “Aluminium is no exception, yet it poses a unique paradox: It is a necessary element of technologies like electric vehicles and solar panels, but its production generates a lot of carbon — 2 percent of all global emissions,” Goldman Sachs said last month.

“Higher aluminium prices will be required to incentivise smelters to invest in cleaner methods of production against the backdrop of rising demand and slowing supply growth. In fact, green demand for the metal is rising just as supply growth is set for a sharp decline in the first half of this decade,” it said.