Aluminum: The Metal of Choice for Substitution, Thanks to Oversupply

Are you a product specialist or designer considering the next generation of your component or product, and does it include aluminum or a material that could be substituted by aluminum such as copper or plastic?

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Well, if so, the words of analysts at Goldman Sachs this month may be worth considering. The investment bank is quoted in a Bloomberg article saying the aluminum market was “facing the greatest bearish fundamental shock in a generation, and perhaps in its history.”

Low Prices .. and Low Delivery Premiums

Prices have dropped 20% this year in Western markets and 30% in China to a 7-year low below $1,500 per metric ton on the London Metal Exchange. In spite of efforts by western producers such as Alcoa, Inc. to curtail production, China continues to add yet more low-cost, state-of-the art production in its northwest provinces based on low-cost coal power production.

A further 3.5 million to 4 million metric tons per year of low-cost smelting capacity is expected to come online in the next 18 months in China, according to Nicholas Snowdon, an analyst at Standard Chartered.

He expects China to have a surplus of 1.4 mmt of aluminum next year, a figure we judge to be conservative based on the levels pouring out of the country as exports. True, the Aluminum Corporation of China (Chalco), has announced the closure of a 500,000 mt per year smelter in northern Gansu, but the plant at Lianchang is said to be some 50 years old and has no captive low-cost power source, instead relying on high-cost grid power.

Producers not only have to contend with the drop in the LME price, but also the collapse of the aluminum physical delivery premium, down from $0.25 per lb this time last year to $0.07/lb today, a further $400 per metric ton fall in return on top of a $500 per metric ton fall in the LME price.

Aluminum Substitution

Goldman Sachs is not alone in thinking we are facing years of depressed aluminum prices and, as such, consumers have the opportunity to consider substituting aluminum for other materials where the supply-demand dynamics are more positive and prices are likely to be higher a year from now. The prospects for long- and short-distance power transmission will be hugely supported by the prospect of low aluminum prices, as will the already significant substitution in automotive of low-weight aluminum in the place of steel, now we have low-weight, low-cost aluminum.

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Only China can effectively put a dent in the relentless rise in metal supply and, with question marks over whether Chalco will even close this aging plant in Lianchang this coming month, it would seem the appetite to tackle the situation is just not there.