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Decarbonization efforts could curb new aluminum supply, keep market tight: BoA

Highlights

Decarbonization raises smelter investment costs

New China supply growth will slow in coming years

Greater efforts to decarbonize the global aluminum industry could deter large investments in smelting capacity over the next several years, especially in China, thus keeping supply tight and prices elevated for at least the next two to three years, Bank of America metals industry strategist Michael Widmer said Nov. 30.

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Primarily, Widmer said investments in new smelters will slow as capital costs increase due to renewable energy requirements.

"You could build an aluminum smelter previously and justify that investment when aluminum prices were above $2,000/mt or $2,100/mt," he said during a webinar hosted by Bank of America. "Because you now need to have access to renewable power, that incentive price has risen to around $2,600/mt or $2,700/mt now. Tackling climate change is expensive."

Widmer said the impact has already been seen in China, with the government applying a 45 million mt/year capacity cap on its domestic aluminum industry in an effort to curb emissions in the country.

"Pile on top of that the uncertainty about the carbon environment and trade restrictions, smelters have been unwilling to announce new projects," he added.

New aluminum capacity in China, which has surged to nearly 40 million mt in 2021 from under 5 million mt in 2000, is now set to level off over the next three years, Widmer said, adding that this will give smelters more pricing power in the market.

LME aluminum prices hovered around the $2,000/mt level at the beginning of the year before rising to over $3,000/mt in October. Prices have since eased, settling at $2,650/mt Nov. 29.