Though aluminium prices have dropped from the three-year high witnessed early this month, they are seen rebounding this year as production growth in China is expected to be lower than initial estimates and demand from other parts of the world is likely to increase.
Last month, US ratings agency Fitch Solutions said that it was revising its aluminium price forecast to $2,050 a tonne from $1,850 for this year as “the market is currently tight amidst supply concerns at a time when demand for manufactured goods is recovering strongly”.
According to Dutch multinational financial services firm ING, global demand is set to remain strong leading to widening supply gap. London Metal Exchange aluminium futures ended at $2,434 a tonne during the weekend. The metal prices had hit a three-year high of $2,535 earlier this month before dropping below $2,450. On Monday, the metal quoted $2,961 on Shanghai exchange, down from $3,117 on May 10. This year, aluminium prices have increased 26.5 per cent. Last week, they rose 6.6 per cent.
Prices surged after Chinese aluminium imports increased 36 per cent in April. Trading Economics website projected the non-ferrous metal price rising to $3,000 by next year-end as traders see the market undersupplied by 480,000 tonnes. Supply shortage is seen rising to 1.08 million tonnes in 2023.
Dutch multinational financial services firm ING sees the global aluminium market continue tightening into a deficit towards 2025. One of the leading aluminium firms Alcoa, in its first quarterly results, said that 2021 would be strong for aluminium based on continued economic recovery and increased demand for the metal.
ING’s senior commodities strategist Wenyu Yao wrote in her analysis that the efforts to reduce carbon emissions would have a dual implication for aluminium. While supply growth in China will be curbed, the global demand for the non-ferrous metal will increase in view of sectors involved in energy transitions such as transport and renewable energy.
Shift to green economy
Fitch Solutions, too, agreed with the view saying aluminium prices would rule high in the coming years as its demand will be supported by the accelerating shift to a green economy. According to the US ratings agency, aluminium consumption last year was 60.51 million tonnes (mt) against a production of 65.13 mt. This year, demand is projected to increase to 62.36 mt and production to 67.60 mt. According to International Aluminium, an organisation of bauxite, alumina and aluminium producers, production last year was 65.29 mt against 63.65 mt in 2019.
Of this, China contributed 37.33 mt last year (35.79 mt). During January-April this year, global aluminium production was 22.21 mt compared with 21.34 mt in the same period a year ago.
Fitch Solutions said Chinese production was a record 37.1 mt last year and it is expected to increase two per cent this year with an additional 3 mt capacity coming up. China has set a cap of 45 mt for aluminium production. During January-March this year, China’s primary aluminium production was on an average 6.3 per cent higher than the year-ago period.
ING’s Yao said that China’s carbon emission topped 420 mt last year. With its production capacity capped at 45 mt, Beijing would have to look for a secondary supply of the metal, mainly from the scrap, and this creates a big uncertainty. Secondary supply had to grow at a compounded annual growth rate of 5.8 per cent, which is higher than primary aluminium supply. China’s production growth was expected to be five per cent, which is lower than the initial projection of seven per cent for this year, the ING analyst said.
Other issues such as cap on energy emissions in Chinese regions such as Inner Mongolia, where there are controls such as energy intensity per GDP and total energy consumed, and China’s primary aluminium production plateauing are likely to disrupt production, says Yao. Analysts say that migration of smelters to Yunnan province to take advantage of cleaner and competitive hydropower was also posing problems since the smelters have been asked to cut their peak consumption by 10 per cent due to coal shortage. On the other hand, China’s demand is seen continuing to be strong, particularly on heels of growth in electric vehicles production and increased offtake of aluminium in cars.
This is one reason why China’s import of aluminium is high this year. This has led to the Communist nation competing with other nations for supplies. It is this situation that will likely keep prices higher, says Yao.
Fitch Solution sees aluminium prices remaining supported in the near-term on strong demand amidst supply concerns, which might ease later this year. However, China easing curbs on import of aluminium scrap could help improve supply and helping improve the inventory globally. This is the risk that the upside in the metal faces.