Aluminum is the jack-of-all-trades of the metal industry: it’s everywhere, underpinning modern life, from an iPhone to a jetliner to a can of beer. For a long time, however, it was difficult to get excited about it. The metal is just dirt: bauxite, one of the most abundant elements on the Earth’s crust. And the bulls couldn’t count on prices getting a boost if China ran short on it — as the country did with almost all other commodities — because the People’s Republic produced lots of aluminum, too.
The industry joke was that to make money in aluminum, one should sell into any price rally. Not anymore. The fight against climate change — with its rush for the light metal coupled with the shutdown of the dirty power sources that helped produce it — has turned the trade upside down. It’s crippling supply, particularly in China. The result is the hottest aluminum market in 30 years.
The surge matters precisely because of the ubiquity of aluminum in modern life. It’s the most widely used non-ferrous metal, ahead of copper. And because it’s everywhere, the price rally will hit everywhere, too, adding to global inflationary pressures and eating at the margins of many manufacturing companies. Everything from government policy to central bank rates to what you pay for groceries will hinge to a large degree on aluminum.
On the London Metal Exchange, spot prices for the metal have surged above $3,300 a metric ton for the first time since June 1988. Worse, manufacturers are paying eye-watering surcharges above the LME price to get hold of physical metal. For example, European consumers of billets — a widely traded form of aluminum — face a premium of about $1,500 per ton, four times higher than the 2000-to-2020 average.
It’s unlikely to be a one-off. In the past, traders used to sell when prices rallied above $2,500 a ton and buy if prices dropped below $2,000 a ton; today, they are still buying the metal after prices have surged above $3,000 a ton. What once used to be a ceiling may be now a floor.
The main culprit is electricity. Turning bauxite into pure metal is an energy-intensive process. On average, producing a ton of aluminum uses the same electricity as an average U.S. family consumes in year. That’s why aluminum smelters are located where electricity is cheap: Canada and Siberia, thanks to their abundant hydropower, or Iceland, because its geothermal energy. Over the last 20 years, China has become, however, the preferred location because of its coal-fired power stations, which delivered ultra-cheap electricity — at the cost of polluting the planet.
Since 2005, China has accounted for virtually all the world’s incremental aluminum smelting capacity, reaching a global share of nearly 58% in 2021 in a market of 67 million tons. China isn’t growing its smelting capacity any more because Beijing is trying to reduce both energy consumption and carbon-dioxide emissions. Last year, China actually forced dozens of smelters to cut output to conserve electricity as the country faced shortages. The market is now waiting to see whether any of those smelters re-start after the Olympic Games.
In Europe, some smelters also cut production in late 2021 due to ultra-high electricity prices. Their return will depend on natural gas and power prices in Europe.
At the same time, demand is increasing — in part due to the fight against climate change. Aluminum is the metal of choice to make vehicles lighter — increasing mileage per gallon in internal-combustion engines, or lengthening the battery range in EVs. When Ford Motor Co. tried to make its popular F150 model more efficient, it increased the use of aluminum on its frame, saving about 700 pounds (317 kg) in weight. For the new customers of aluminum, including the likes of Tesla Inc., a “we-must-have-the-metal” attitude pushes demand up even more.
Under these conditions, the aluminum market shifted into a deficit of more than one million tons in 2021, a trend that’s likely to continue this year. The deficit is drawing down stocks rapidly. In 2014, LME stocks of the metal peaked at nearly 5.5 million tons. At this point in 2022, they have dropped below 800,000 tons. Inventories in China and elsewhere are also falling. CRU Group, a consultant, estimates that stocks would cover just 36 days of demand by the end of 2022, a record low.
Unless China re-starts some of its domestic capacity — or a new smelter is built somewhere else in Asia — sooner or later the market will have to force demand down. Inventories simply cannot be drawn down at the current pace for much longer. With consumption stickier than in the past, the result is likely to be much higher prices. The last time the market had to ration supplies via prices to rebalance the market, spot aluminum surged above $4,000 a ton. It’s a valid point of comparison, 35 years later.
More From This Writer and Others at Bloomberg Opinion:
What If Goldman Is Wrong and a Lonely Oil Bear Is Right?: Javier Blas
Don’t Panic, Europe. That’s Not Inflation. It’s Just Gas: Marcus Ashworth
$3-a-Gallon Gasoline Isn’t as Painful as It Used to Be: Liam Denning
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.”
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