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Aluminium price analysis: will the power crunch lift prices?

By  Yoke Wong

Edited by Vanessa Kintu

07:27, 26 November 2021

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Aluminum
Aluminium Spot
2497.17 USD
-42.47 -1.680%
Aluminum
Aluminium Spot
2497.17 USD
-42.47 -1.680%
Aluminum
Aluminium Spot
2497.17 USD
-42.47 -1.680%

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Aluminium price analysis: will the power crunch lift prices? Photo:Shutterstock

Aluminium prices fell over the past month as lower energy costs eased pressure on metal smelting operations.

The three-month aluminium contract traded on the London Metal Exchange (LME) closed at $2,690.00 a tonne on 23 November, down 1.1% from $2,719.50 at the beginning of the month.

Prices have been falling over the past month as China, the world largest aluminium producer, ramped up coal production amid power supply shortages in the country. This led to lower coal prices, which reduced energy costs for aluminium production.

Despite aluminium’s price declining over the past weeks, analysis on Investing.com indicates that the metal is still a strong buy, based on its moving averages and technical indicators. 

Aluminium smelting is an energy-intensive sector – energy accounts for approximately 30 to 40% of metal’s production costs. Energy cost efficiency will depend on the smelters – the more technologically advanced smelters couold use less electricity. 

Data recorded by S&P Global Platts shared Chinese research consultancy Antaike’s  report that electricity accounted for 35.1% of aluminium production costs in September. 

Coal production in China increased to 357 million tonnes in October, up 4% from the same month last year, according to data from the China National Bureau of Statistics (NBS). Chinese coal output in January to October also grew by 4% year-on-year to 3.3 billion tonnes.

Increased Chinese thermal coal production has caused coal prices to tumble since October. The ICE NewCastle thermal coal November contract plunged to $157 a tonne on 23 November, down from the 5 October peak of $280 a tonne.

In this aluminium analysis, we’ll look at the latest aluminium price news, recent aluminium market trends and the metal’s outlook.

Aluminium price trend in 2021

Aluminium prices have been rising for most of 2021 – the metal started the year at $2,016 a tonne. The uptrend was driven by the post-Covid-19 economic recovery and increased aluminium demand in vehicle manufacturing. 

Aluminium prices rallied further when the Chinese government capped electricity consumption for energy intensive industries such as aluminium and steel production in the second quarter. As power shortages worsened over the summer months in many parts of China, several aluminium smelters in the province of Guangxi and Xinjiang were required to cap output for the year. The three-month LME aluminium prices spiked to a decade high at just under $3,000 a tonne on 10 September.

Prices continue to break fresh highs, hitting a 13-year peak on 19 October at $3,194 a tonne after a military coup in Guinea raised supply concerns over bauxite. Bauxite contains alumina ore, and the West African nation produces one-fifth of global output. Aluminium producing countries such as China and Russia rely on Guinean bauxite.

5 year alumihium price chart

Prices have since dropped below $3,000 amid lower energy costs.

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Higher production costs to stay

Despite the fall in coal prices over the past month, analysts from financial analytics service provider ING believe higher aluminium production costs may be here to stay. Unless there’s a technological advance to drive down the energy intensity of primary aluminium smelting or a way to access cheap, renewable energy for Chinese aluminium producers, prices could remain high, opined senior commodities strategist Wenyu Yao. 

Following an energy pricing reform in October, China has implemented a new pricing mechanism for on-grid electricity in the country – energy tariffs are now calculated based on a “base + floating” formula.

Energy intensive industries could be paying higher electricity prices as the new pricing mechanism allows the on-grid price to fluctuate by more than 20% on top of the base tariff.

“Assuming other input costs remain unchanged, a 20% rise in power prices would result in around a 7% increase in costs,” said Yao.

“Some provinces, such as Inner Mongolia, have significantly hiked the floating percentage to as high as 80%. Others such as Guangxi province, one of China's major aluminium production hubs, is set to slap a 50% premium on electricity prices for those energy-intensive industries.” 

With energy prices for Chinese aluminium producers expected to stay high, rating agency Fitch Solutions has revised upwards its short-term aluminium price forecast.  

As a result of strong market fundamentals, Fitch Solutions have increased its aluminium price forecast for the next five years.

The consultancy raised its average aluminium price projection to $2,450 a tonne for 2021, up from the previous forecast of $2,200. For 2022, the new forecast is $2,500, up 20% from its previous forecast of $2,000. Fitch Solutions expects aluminium prices to reach $2,500 in 2023 to 2024, 31.6% higher than its previous projection. The consultancy forecast aluminium prices to fall to $2,250 in 2025, but this revised prediction is still 18.4% above its previous forecast.

“Power disruptions in China have led to production capacity curtailments that, together with delayed ramp-ups and restarts, have led to significant deficits in 2021 that we expect to continue in 2022 with a tight market balance thereafter,” said Fitch Solutions.

“Weaker demand from some end-markets, including that linked to chip shortages, has been more than offset by production cuts. Demand for aluminium in the medium and long term will be supported by its application in electrification and energy transition.”

Analyst average aluminium price forecast for 2021 to 2025

Despite high energy prices, global aluminium production rose in the first ten months of this year. 

According to data from the global body for the primary aluminium industry, International Aluminium Institute (IAI), output increased to 56.3 million tonnes in January to October, up 4% compared to the same period in 2020.

China produced 32.37 million tonnes of primary aluminium in the first ten months this year, up 6.5% compared to the same period in 2020, data from NBS showed. 

Aluminium production rose by 65.15 million tonnes from January to October this year, up 6.6% from the same time last year, NBS data showed.

FAQs

Will aluminium prices go up or down?

Many analysts expect aluminium prices to stay below $3,000 a tonne in the short-term. Analysts from Fitch Solutions expect the average aluminium price at around $2,250 to $2,500 a tonne in 2021 to 2025, below the 13-year high reached in October this year. 

However, analysts’ forecasts can be wrong. Do your own research before making investment decisions based on these forecasts. And never invest more than you can afford to lose.

What factors affect the price of aluminium

The aluminium price is driven by its supply and demand. Higher vehicle and aerospace demand will likely support the market. Supply is also a key factor as disruptions in global bauxite mining operations and production can also affect the metal’s price.

Read more: Silver price forecast: where next for the precious metal?

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