The energy crisis and strong demand have caused the price of this key material for the global economy to skyrocket.
Beer cans, cell phones, windows, cars, airplanes, and countless other things we use every day have something in common: aluminum. This material (lightweight, ductile, highly conductive, corrosion-resistant, and fully recyclable) has suffered more than any other from the impact of the energy crisis affecting various economies. And with good reason. Its production process requires a huge amount of energy: one ton requires four times the annual electricity consumption of an average household in Spain. As a result, its price has skyrocketed on the markets. The cost of electricity, however, has only been the icing on the cake that has further widened the gap between supply, which has lagged behind demand, and uncertainty about supply.
"Aluminum is in the midst of a perfect storm," says Wenyu Yao, a commodities expert at ING. As the global economy has recovered from the blow of the health crisis, consumption of this material has skyrocketed. Recovery plans around the world, but mainly in China, Europe, and the US, have fueled demand, which is expected to grow by 10.2% by the end of this year, after falling by 2.1% in 2020, according to figures from Bank of America. Sectors such as construction, transportation, food, packaging, electronics, and recently those related to green energy are already consuming much more aluminum than in 2019. But supply has not reacted in the same way. Beijing is in the eye of the storm.
The Asian giant, which accounts for 60% of global aluminum production, has experienced an unprecedented energy crisis. On the one hand, the government has restricted electricity consumption by large consumers, such as the metallurgical industry. Its goal is to reduce pollutant emissions. On the other hand, the price of thermal coal (the source of almost 70% of the country's electricity) has skyrocketed due to a variety of factors: from production cuts (due to mine closures in the face of safety concerns and corruption cases) to China's ban on purchasing raw materials from Australia (because Canberra insisted in 2020 on investigating the origin of the pandemic). The instability brought about by the coup in Guinea Conakry, the world's second-largest producer of bauxite, the natural material from which aluminum is extracted, and China's main supplier, has also had an impact.
Following this storm, aluminum futures reached their highest level in 13 years on October 18: $3,180 per ton (about €2,800 at the current exchange rate). Today, the price (on the benchmark market: the London Metal Exchange) is between $2,500 and $2,600. The Chinese authorities have intervened in the local coal market by boosting production. "And immediately, the cost of the metal reacted downward," says Charlie Robertson, chief economist at Renaissance Capital, an investment bank focused on emerging markets. "There is sufficient supply... at least for the moment," says Daniel Briesemann, a commodities expert at Commerzbank, a German bank. The outlook is not promising. Energy costs are compounded by a shortage of magnesium, which is essential for aluminum alloys. The magnesium industry, which has also been hit by power cuts, is controlled by China, which accounts for 87% of global production.
Inventories in decline
Adding to this scenario is the fact that aluminum inventories are running low. They are currently at their lowest level since 2005. All of this suggests that the world will have a global deficit of this material in 2022, according to Fastmarkets MB Research, a mining consultancy. "We are seeing the deepest deficit in the global market in at least 20 years," Duncan Hobbs, a specialist at Concord Resources, told Bloomberg.
China will cut around 7% of its annual aluminum production capacity this year due to the energy impasse, according to estimates by Wood Mackenzie. This will have an impact on costs. "Metal prices will rise in the coming months and remain at historically high levels," warns Ross Strachan, an analyst at CRU. And Europe is not on the sidelines in this story. Fifty percent of the region's aluminum needs are met through imports, with China being the main seller, according to the latest data from European Aluminium, an association that brings together some 80 European producers.
The rest of the aluminum consumed in Europe comes from recycling and production, which has also entered into crisis due to rising energy prices in the region. This is happening while demand continues unabated. By the end of the year, consumption of the material in Europe will increase by 11%, compared to 7.2% in China and 6.8% in North America, according to Fastmarkets. "And it will continue to rise due to the boost it is giving to renewables," explains Armando Mateos, president of the Spanish Aluminum Association. The insides of wind turbines, solar panels, and electric vehicles are full of minerals.
A major consumer of electricity
Aluminum is the third most common element on Earth. Only oxygen and silicon exist in greater quantities. After iron (used to make steel), aluminum is the metal produced in the greatest volume worldwide. According to Bloomberg, if all alloy production worldwide were counted as a country, it would be the fifth largest annual consumer of electricity on the planet, with more than 900 million megawatts. The International Energy Agency (IEA) estimates that 59% of the energy used to produce this metal comes from coal.
Via. ElPais
