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FEATURE: Aluminum prices hit 13-year high on supply tightness, concerns

Highlights

Price testing record highs

Rallying power prices create hostile environment for smelters

China also driving price rises

  • Author
  • Jacqueline Holman
  • Editor
  • Richard Rubin
  • Commodity
  • Coal Electric Power Energy Transition Natural Gas Metals
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  • United States

Aluminum prices have reached a 13-year high, due to supply tightness caused by production curtailments and closures in Europe due to high energy costs, as well as issues in China and uncertainty over possible sanctions on Russia

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The LME aluminum cash price closed at $3,247/mt Feb. 9, the highest level since July 2008 and also up 15.3% since the start of 2022.

Liberum Head of Commodities Strategy Tom Prices told S&P Global Platts Feb. 10 that, in terms of nominal price levels, the market testing aluminum's record highs at almost above $3,300/mt.

Bullish factors including power costs having spiked due to winter and Russia capping gas supply, which in turn had prompted production cuts leading to supply shortages, he said.

Standard Chartered Global Research Executive Director and commodities analyst Sudakshina Unnikrishnan told Platts that the key impetus for higher prices was a challenging supply-growth outlook.

"Aluminium production is energy intensive and energy costs globally account for over one-third of production costs on average," she said. Rallying power prices in Europe had created a hostile environment for aluminum smelters by raising costs significantly, which had led to production cuts or shutdowns in France, Germany, Spain, Netherlands, Montenegro, Romania and Slovakia, she added.

"These smelters sit at the high end of the cost curve, with energy costs comprising a sizeable chunk of production costs," Unnikrishnan said. "They are therefore extremely sensitive to European power prices, which have rallied sharply in recent months."

The most recent hit to European supply was the Slovalco aluminum smelter in Slovakia which is majority-owned by Norsk Hydro.Slovalcosaid Feb. 7 that it would be cutting production at the smelter to around 60% due to high energy and carbon prices.

Previous closures in Europe include aluminum group Alcoa, which temporarily curtailed its San Ciprian smelter in Spain on Jan. 1 for two years until January 2024 due to ongoing challenges from high energy prices.

Romanian smelter Alro said announced in December a planned 2022 reduction of primary aluminum by 60% by running only two out of its five electrolysis halls. But it said in late January that it hoped to resume electrolytic aluminum production to previous levels in 2023, depending on energy prices.

The Dunkirk smelter in France also lowered production of aluminum by 15% in January, while Trimet previously cut output at its Essen, Hamburg and Voerde smelters in Germany by 30%.

Dutch aluminum producer Aldel halted production of primary aluminum at its Delfzijl plant in October, Talum cut output from its smelter in Slovenia in November and in Montenegro, Uniprom's KAP smelter has also reduced output.

"If energy prices go higher or remain elevated then the potential for more aluminum smelter cuts in Europe is certainly possible," Unnikrishnan told Platts.

Other factors at play

Besides the high European energy prices causing producers to cut supply, other drivers have also been at play.

"Europe's alumina costs -- about 25% of total cost of metal production -- have lifted 30% on bauxite supply risk," Price said, citing a coup in Guinea coup and Indonesia export controls.

US demand was also robust, with premia holding high, which was leading to the US drawing more Canadian supply and also seeking new supply options, such as the removal of the Section 232 tariff constraints towards the end of 2021.

China also remained a main driver of the price increases, Price said, pointing towards positive local demand growth, slowing local supply production growth and higher upstream, bauxite and alumina costs, which had all resulted in higher imports and lower exports of refined semis.

"All are contributing to global market tension," Price said.

Unnikrishnan said China's power rationing and its domestic hydropower shortages had also hindered supply growth.

"While the power rationing and shortages that impacted China's aluminum output in late Q3 and early Q4-2021 have eased on better coal supply, other dynamics affecting China's output remain," she said.

This included the dry season in Yunnan and the timing of the Winter Olympics in the near-term; and more longer-term, the "dual control" policy targeting energy use and intensity and China's decarbonization aims.

"We also expect a combination of the above factors to lead to delays in bringing newly commissioned capacity online," Unnikrishnan said. "Provinces in China have curbed output by energy-intensive industries to meet energy use and emission targets (especially impactful given that over 80% of China's smelters are coal-fired); while hydropower shortages in Yunnan, where most new renewables-based aluminum capacity will come online, raises capacity concerns regarding the province's power system."

In addition to the more stringent energy and emissions targets, she added that access to power was crucial to China's expanding output growth, thanks to preferential power tariffs and smelters being built around captive power plants in coal-rich provinces.

Potential Russian sanctions

Carsten Menke Head Next Generation Research Julius Baer said in a Feb. 9 note that the potential sanctions against Russia had "the potential to create havoc in the aluminum market and such sanction would be very ill advised," and result in much higher aluminum prices, although the risk had already been partly reflected in the market.

"Furthermore, Europe is an important export destination for Russian aluminum and in light of the increasing tensions around Ukraine, the aluminum market seems to be reflecting a rising risk of sanctions," Baer said.

Such sanctions could cause havoc in the globally interconnected aluminum market, as they would stop the flow of refined metal from Russia, as well as the flow of raw materials, such as bauxite or alumina, to smelters and refineries, he said.

"While this is very much a binary event for the market, we believe it is already partly reflecting the related risks, judging by the recent price performance," Baer said. "Hence, we refrain to chase the current rally."