Despite supply snags amid the COVID-19 pandemic, aluminum prices spiked to $3,000 a ton – breaking a 13-year record since 2008 when the metal reached the same prices.
This surge despite blunt forecasts that supply disruptions will be permanent despite increasing demand. These spikes have been attributed to supply chokes in the metals biggest producer China, where the government is bent on placing restrictions on production. As a result of these scarcity fears, prices shot up.
Analysts note that the price of the lightweight metal, in demand in construction and packaging, has jumped 50% this year and over 15% within three weeks alone. Supply disruptions have been rampant within the metal industry, such as Chinas aluminum smelting, Guineas bauxite mining, and Jamaicas alumina refining.
According to Gianclaudio Torlizzi, an analyst at consultants T-Commodity, the market appeared to be over-extended, but the price surge for aluminum will rise. The most common reasons behind this price increase include Chinese production cuts, raw material aluminas price increase, and high demand.
Torlizzi concluded that with these factors considered, its difficult to be bearish.
Chinas production curbs
At the heart of this surge in aluminum are Chinese producers struggling with output restrictions. On Monday, Steelhome announced that Yunnan province, one of Chinas major aluminum producers, is implementing production restrictions beginning this month to address energy intensity reduction objectives.
Yunnan province has instructed its hydropower smelters to maintain average August-level monthly output from September through October or even lower. These production curbs have already led to a decrease of over 1 million tons of annual capacity around August.
Moreover, Goldman Sachs Inc. reported that European Union smelters are likewise saddled with increasing costs given high power inputs and carbon credits.
A Goldman Sachs analyst, Jeff Currie explained that policy risk involving aluminum in China and the EU has been growing. Specifically, while banks have not been entirely wary of the coup in Guinea influencing bauxite prices, regional tensions have not been easing. If these continue, logistical bottlenecks could still impact metal prices, he added.
Supply difficulties to last until 2022
Supply snags will continue to hound the industry throughout the year until the better part of 2022. Participants at the Harbor Aluminum Summit in Chicago came up with this assessment, with many of them predicting that it will take as long as five years for supply to normalize.
Aluminum, being energy-intensive, has surged nearly two-thirds during the previous year. It jumped to almost 2.6 percent to $3,000 per ton – its highest ever level recorded on the London Metal Exchange (LME) since 2008. Elsewhere, in China, aluminum rose to nearly 5.4 percent since its highest level in 2006.
Chinas largest smelter, Aluminum Corp. of China Ltd., increased by 8.1 percent in Hong Kong. Citigroup Inc.s analyst Jack Shang said that the countrys material equities might still require re-rating given the move to limit steel production. As a result, this could drive prices for steel, aluminum, and steel.