An aluminum market that has lived with Chinese oversupply for two decades is experiencing a very different year in 2021.
According to Reuters, it is starting to price in a very different future.
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Aluminum prices of the future
The world needs more aluminum to go green. However, the smelters that produce the stuff use huge amounts of power. Those smelter account for around 2% of all manmade emissions each year, much of which is due to Asia’s overwhelming reliance on coal as a power source.
Squaring the circle between aluminum’s huge power demands and efforts to meet emissions commitments is proving very challenging for China’s aluminum industry. The post reports IAI estimates that the world will need another 25 million tons of primary metal production to meet an expected 80% rise in demand by 2050, fueled in large part by the drive to decarbonize.
Yet, even that daunting target assumes a 100% recycling rate. Even with the best of intentions, that is unlikely to happen.
Investors are aggressively buying into this story.
Domestic supply is constrained by drought in southwest Yunnan province, which relies on hydropower, forcing the rationing of electricity in recent months due to a prolonged dry season.
Meanwhile, the Financial Times reports southern Guangxi province may order production cutbacks in aluminum and steel in a bid to reduce pollution and meet environmental targets.
Yet while demand for “greener” aluminum, generally hydro-based, China’s best-positioned province may have its plans curtailed if low rainfall becomes a repetitive phenomenon. Yunnan is forecast to account for 50% of the global growth in aluminum production between 2020 and 2023, according to Reuters sources. However, that target is in jeopardy if poor rainfall persists.
Robust demand and underproduction is resulting in Shanghai exchange inventory falling from over 392,000 metric tons in April to a current 248,926 metric tons. Speculator positioning is significant, boosted by China importing 1.06 million tons of primary metal last year and another 744,000 tons in the first half of 2021, with no sign of any letup in the preliminary July figures.
Perennial bull Goldman Sachs has increased its 12-month price target for aluminium to $3,200 a ton last week, seeing no letup in demand recovery and continued supply constraints stretching well into the middle of next year.
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