Aluminium sector braces for rising demand and prices

There is talk of a possible “seismic shift” in the aluminium sector due to demand that is expected to start increasing as a result of actions being taken by many companies and countries related to climate change. This is the case of the world’s largest aluminum producer, China, which is taking steps to reduce smelting processes.

“China saying it is going to reduce coal use is potentially a game changer for aluminium, but the price tipping point is not far away,” Dan Smith, managing director of Commodity Market Analytics, said recently. And is that in April, the price of aluminum rose to record highs in three years by doubts in supply.

From oversupply it looks like we will move to shortages which, of course, will lead to higher prices. Aluminium is a material in daily use in all industries and, in some industries, its use is increasing due to environmental requirements.

This year, the London Metal Exchange has been a witness. Aluminium rose by 26%, or about $2,500 per tonne. Goldman Sachs is among those who see more gains ahead, forecasting record prices above $3,000 by the end of next year, according to some media reports.

But what is the outlook and what events may be influencing this possible “seismic shift”?

Clearly Covid-19 has disrupted all industries. On the one hand, demand in the automotive and construction industries are depleting inventories. On the other hand, the containment measures have logically influenced a change in habits: closed restaurants and increased consumption at home; therefore, there is a shortage of aluminium cans. Because of this, companies have been forced to import from East Asia and South America at a time, moreover, when freight rates are skyrocketing.

The case of China is of great concern. In 2017 the Asian government already started to carry out measures to reduce smelting to 45 million tons per year to meet its climate targets for lower carbon emissions. It is said that the ceiling will reach China in 2024, which is when it will go into deficit.

Trafigura Group, a multinational company based in Geneva and Singapore dedicated to the marketing of oil products, metals and minerals, among others, estimates that aluminum must reach $ 3,500 in the next year to avoid deficits, given the time lapse to build new smelters. According to him, there are logistical bottlenecks to consider, higher transportation costs, as well as taxes and tariffs that “are wreaking havoc on the spot market”.

Meanwhile, according to Reuters, analysts at Citi “expect aluminum demand to rise 6.4% this year to almost 68 million tons and 4.6% in 2022 to almost 71 million tons. Their forecast is for a surplus of 720,000 tonnes this year and a deficit of 590,000 tonnes in 2022”.

To complete the picture, United Co. Rusal International, the largest aluminum producer outside China, may slow shipments because of a new Russian export tax.

Clearly, a seismic shift is coming.