Aluminum and Oil Prices: Keep an Eye on These Two

Aluminum prices have risen this year, but not as much as other base metals. Aluminum continues to struggle near $1,700/mt, a level that prevented prices from rising three times this year.

3M LME aluminum near stiff resistance levels
Three-month LME aluminum near stiff resistance levels. Source: MetalMiner analysis of data.

Many analysts argue that this year’s rally is limited because they expect Chinese smelters to restart capacity in the fourth quarter. The argument is that now that aluminum prices are higher than at the beginning of the year, smelters making aluminum will be more profitable.

MetalMiner Price Benchmarking: Current and Historical Prices for the Metals You Buy

Some capacity has already been restarted, but the numbers are running short of analysts’ expectations. Despite all fears, it’s possible that aluminum output in China will not increase as most analysts are predicting. Why? Let’s look at the cost curve:

Energy Prices Rise

It takes a lot of energy to smelt aluminum. Indeed, energy accounts for around half of the cost for Chinese smelters to produce aluminum. While aluminum prices have increased 13% this year, thermal coal prices have surged near 70% this year. As energy prices increase, Chinese smelters are getting squeezed, making it tougher for them to expand production.

Oil prices near stiff resistance levels. Source: MetalMiner analysis of data
Oil prices near stiff resistance levels. Source: MetalMiner analysis of data.

For this reason, it’s not a surprise that oil prices, the main benchmark for energy prices, look very similar to aluminum. Oil prices are currently at a stiff resistance level near $50/barrel.

What This Means For Metal Buyers

Most analysts expect capacity restarts to weigh on aluminum prices. However, higher energy prices could prevent Chinese smelters from restarting capacity. Oil prices are now trading near a key level. If oil prices manage to trade above $50/barrel, we would expect aluminum to finally break above $1,700/mt.


  • Do you really suggest that there is a causal relationship between crude and thermal coal in China?

  • Yes, crude and thermal coal prices correlate. Both are energy commodities and if one of them became very expensive, people would start using more of the other. Both thermal coal and crude peaked in 2011 and bottomed earlier this year.

  • Interesting, thank you. So they are correlated but in terms of switching can you provide an example where people ( or e.g. aluminium smelters) have switched from oil to coal because one has become relatively cheaper?

  • Historically, when oil was cheap, new energy came dominantly from oil. When it wasn’t it came dominantly from coal. Between 1965 and 1979, new generation from oil was four times higher than from coal. In the following decade, coal added about 400 million tonnes and oil did none. Between 1989 and 2002 oil added six times as much as coal, and since 2002 coal has added three times as much as oil.

    The price of oil relative to the price of coal is what motivated these swings in output. The situation is the last decade is a bit more complicated due to the rapid expansion of coal-fired generation in China, but the trend is in the same sense. For specific examples, you can find more information online.


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