Aluminum Buoyed by Coal and CO2

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Non-ferrous Metals

We have written recently about the price of aluminum and expressed our belief that the high stocks and current excess of production over demand should keep a cap on prices. Western world unwrought aluminum stocks rose from 1.58 million tons in April to 1.67 million tons by the end of May according to a Reuters article. So it was a little surprising to see a UBS bank report suggest that the high price of energy, particularly coal, could hasten the closure of many less viable production facilities and hence push the aluminum market into a deficit of 200,000 tons by the end of this year.

While we wouldn’t dispute the likely affect of high energy costs on some marginal production facilities we expect the softening of western demand to mitigate a shortage of production capacity. Timesonline suggests prices could hit $ 4000 per ton over the next two years as Chinese capacity faces widespread closures and production elsewhere is cut back. The article also added the possible double whammy of environmental costs to the cost of production. Apparently a single 500,000 ton per annum aluminum smelter using electricity from a coal fired power station will generate the equivalent CO2 output to the whole of Honduras. Aluminum produces 2 tons of CO2 for every ton of metal but a further 12 tons of CO2 are produced making the electricity that is required to make 1 ton of aluminum. So if aluminum were required to meet the full 14 tons of CO2 required to make one ton of metal it could add a further $ 70/ton to the price of aluminum at today’s Chicago Climate Exchange price per ton of CO2. All in all we are not convinced $4000/ton is on the cards in the short term but it’s interesting to think the aluminum price going forward may have as much to do with coal and carbon dioxide as it does with industrial demand and the cost of bauxite.

–Stuart Burns

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