Aluminum MMI: Energy crisis hits production, buoys prices

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The Aluminum Monthly Metals Index (MMI) rose 4.8% following two consecutive months of decline.

January 2022 Aluminum MMI chart

After a sharp 7.6% drop in the early days of November, prices appeared to have found a bottom and formed a bullish “cup and handle” technical pattern around the summer support levels.

Aluminum prices have broken out of the bullish pattern and now seek new resistance levels on the smaller time frames. The October high will serve as the price target on the longer time frame for this newly confirmed price reversal.

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Europe’s energy crisis shutters production

The European energy crisis remains bleak, as the aluminum sector sees further casualties.

Our own Stuart Burns noted last week that Europe’s largest (Aluminum Dunkerque Industries France) and second-largest (Alcoa’s San Ciprián) smelters saw production derailed as energy prices surged.

The cuts continue to roll in.

Most recently, Norsk Hydro’s Slovalko smelter will drop production to 60%. This cut, which equates to roughly 35 thousand mtpa, follows a previous cut which had lowered production down to 80% in 2019.

Soaring energy prices throughout Europe have eroded smelter profitability. Those smelters that rely upon long-term energy supply contracts and renewable energy, including hydroelectric capacity, have remained largely sheltered from the closures and cutbacks.

As such, Alcoa signed long-term renewable energy contracts for its San Ciprián plant. The plant will still remain closed until 2024. When it reopens, it will receive roughly a quarter of its energy requirements from Madrid-based Capital Energy.

Aluminum prices hit a two-month peak. Premiums continued moving upwards as concern mounts over tight supply and advancing input costs.

While shipments of U.S. liquefied natural gas to Europe provided some short-term relief, there is no immediate solution to the energy crisis, as gas prices continue to surge. The shipment managed to drop gas spot prices by nearly 40% at the end of last month. However, as Bloomberg reported, forward contracts fell by only 30%. That would indicate the market expects high energy prices and shortages to persist well into the future.

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Chinese state firms hit with power cuts

As the energy crisis roils European smelters, China remains unwavering in its carbon emissions goals.

Following a directive from state regulators, the aluminum sector will be forced to cut energy consumption. The cuts will affect state-owned enterprises, specifically, and will require the firms to reduce carbon dioxide emissions by 18% per CNY 10,000 by 2025. Furthermore, they will have to cut energy consumption by 15% per CNY 10,000.

The aluminum sector accounts for roughly 4% of China’s carbon footprint, according to mining.com.

Nonetheless, primary aluminum production in China is expected to grow by 4.3% year over year. Estimates show China’s primary aluminum output reached 38.9 million metric tons in 2021 and alumina output reached 75.1 million, S&P Global Platts reported.

New smelter capacity

In spite of the cuts driven by surging energy prices and China’s emissions goals, new smelter capacity is on the way.

According to a late December announcement, India’s Adani Group intends to build an alumina refinery and aluminum smelter. The announcement was made upon the incorporation of Mundra Aluminum Limited, although no further details were released.

Indonesia’s PT Adaro Energy likewise intends to construct an aluminum smelter. The coal company’s subsidiary, PT Adaro Aluminum Indonesia, will build a $728 million smelter on the island of Borneo. The company was motivated by high optimism over the future of aluminum demand and will benefit from being located within an industrial park that plans to construct an 11,000-megawatt hydropower plant.

Lastly, Norsk Hydro ASA announced it will add $6.6 million worth of improvements to its Ådral aluminum smelter. Construction will commence in the spring of 2022. The company expects to complete the improvements within the year. The improvements are aimed at plant modernization, plus advancing profitability and efficiency.

Upon completion, the smelter is expected to reduce its energy consumption by roughly 660 MWh per year.

Actual metals prices and trends

The LME three-month aluminum rose by 6.68% month over month to $2,810 per metric ton as of Jan. 1.

Chinese primary cash aluminum jumped by 10.58% to $3,163 per metric ton. Meanwhile, Chinese aluminum scrap rose by 3.88% to $2,269 per metric ton per metric ton last month. Chinese aluminum billet rose by 8.91% to $3,199 per metric ton.

Meanwhile, European 1050 aluminum sheet held firm at $4,523 per metric ton.

Indian primary cash rose by 8.8% to $3.09 per kilogram.

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