Supply constraints in China amid strong demand pushed aluminium prices to a 10-year high on 31 August. The spot aluminium contract on the London Metal Exchange (LME) hit $2,714 per tonne on the last day of August after rising throughout the first eight months this year.
Daniel Hynes, commodity analyst at ANZ Commodity, commented on the recent price hike: “The metal, which is used for everything from car parts to home appliances, has fared well as consumer demand and economic activity bounce back. However, it’s the rising risk of further supply disruptions in China that is causing angst in the market.”
So, will aluminium’s value continue to rise in the coming years? This article looks at the key drivers for the metal and the latest price forecasts from analysts.
What has been happening to aluminium prices so far in 2021?
According to the aluminium price chart, the metal started 2021 at $2,013 per tonne, and continued steadily appreciating throughout the year. The uptrend was temporarily halted when prices dipped in May during a correction.
On 24 May, the price dipped as low as $2,305 per tonne before rebounding to $2,341 the next day. Since June, the commodity has been reaching new highs.
The price uptrend in the first half of the year was driven by optimism surrounding a post-COVID economic recovery, plus the increased demand of aluminium as a light metal in the global transition towards decarbonisation.
China – the world’s largest aluminium producer – has continued to crack down on pollution and has enforced reforms aimed at decarbonising the country’s economy. The Chinese government has capped electricity consumption for energy-intensive industries such as aluminium and steel production earlier this year. Coupled with power shortages in many parts of China, several aluminium smelters in the province of Guangxi and Xinjiang were required to cap output for the year.
ABN Ambro said in a report published in May:
“[The firmer aluminium price] was triggered by optimism over global economic recovery, hopes of longer-term robustness of metals demand in relation to the energy transition and worries over future supply trends."
Lower Chinese aluminium output could support prices
Many Chinese provinces incentivise aluminium production by offering reduced power tariffs to metal producers. However, the Chinese government has banned the practice of preferential electricity tariffs for the aluminium industry in a decarbonisation policy announced on 27 August. This policy is part of China’s reform to transition to a green, low-carbon economy.
As a result, some expect China’s aluminium output to fall this year, leading to reduced product supply globally. However, the nation’s aluminium production in January–July has increased year-on-year.
China produced 22.8 million tonnes of primary aluminium in the first seven months this year, up 9.5% compared to the same period in 2020, data from China’s National Bureau of Statistics (NBS) showed. Alumina (the common name given to aluminum oxide, or Al2O3) production also rose to 45.78 million tonnes from January–July, up 10% from the same time last year.
Nonetheless, the energy cap could limit Chinese aluminium output increases for the rest of the year.
Data from the global body for the primary aluminium industry – International Aluminium Institute (IAI) – also showed higher global output in the first seven months of 2021. Primary aluminium production increased to 39,284 thousand metric tonnes, up 4.6% from the same period in 2020.
China is self-sufficient in aluminium and rarely imports unless it becomes profitable to do so. When LME prices fall below Shanghai Futures Exchange (SHFE), the arbitrage would be favourable for imports into China.
By the end of August, the SHFE aluminium price was above the LME contract. The most actively traded contract on the SHFE for delivery in October was last seen at RMB 21,390 ($3,311) per tonne on 31 August, hovering near its highest since August 2008.
Strong demand amid supply tightness supports the market
In addition to the supply disruption in China, strong demand in the rest of world is also supporting aluminium prices.
On 20 July, LME broker Sucden Financial said during the webinar: “Demand for aluminium remains robust, order books have been filling across major consuming regions as construction, manufacturing and industry restarts and grows.”
Passenger car registrations in the European Union (EU) increased in the first half of this year to 5.36 million units, up 25% compared to the same period in 2020, according to data published in July by the industry body European Automobile Manufacturers’ Association (ACEA).
Despite the growth in new vehicle sales, ACEA said demand “is still 1.5 million units below the pre-COVID volume recorded over the first six months of 2019”.
EU commercial vehicle registrations also increased by 36.9% year-on-year to one million units, with the demand largely driven by Central European countries, ACEA said earlier in July.
The rising freight rates amid container shortages have also caused shipping costs for aluminium to rise throughout the year, leading to longer delivery wait times for consumers, which has caused particular supply tightness in the European market, added Sucden Financial.
Europe imports primary aluminium from Russia, Canada and Africa, and the shipping costs from these regions are adding to the costs of aluminium trading.
The aluminium spot market for prompt delivery has been quiet over the summer as most consumers plan ahead and buy aluminium for the fourth quarter of 2021 and first quarter of 2022, according to price-reporting agency Argus Metal.
Rising aluminium scrap recycling to meet 50% demand by 2050
Aluminium is one of the most recyclable materials. The post-consumer scrap intake comes from three main sources – packaging, vehicles, and building and construction – according to IAI. In 2019, global aluminium scrap use hit a record 20 million tonnes for the first time since IAI started recording the data 70 years ago.
Marlen Bertram, IAI director – scenarios and forecasts, said: “Aluminium demand is expected to increase by about 80% in 2050, and the IAI forecasts that recycled aluminium could meet half of that demand.”
“With ambitious collection targets for used beverage cans and improved recycling technologies for foil, this rate could even be higher.”
Now, what does the latest aluminium price forecast for years ahead look like?
Aluminium price prediction: where to next?
Increased demand, coupled with rising freight costs, has boosted the aluminium price outlook. Back in May, consultancy firm Fitch Ratings upgraded the metal’s average 2021 price target from $1,950 to $2,200 per tonne.
When considering analyst commentary, it’s important to bear in mind that they can get their estimates wrong. You should always do your own research, taking care to consider all relevant market conditions.
How to start trading aluminium in 2021
What’s your view of the market? One way to trade aluminium, as well as a plethora of other commodities, is with contracts for difference (CFDs) on Capital.com. CFD trading allows you to speculate on the movements in the commodity’s price without having to own the underlying asset.
CFDs give you the opportunity to try to profit from both positive and negative price fluctuations. If you expect the aluminium price to continue rising, you can open a long position, whereas if you think it will fall, you can short the commodity.
As a leveraged product, CFDs are designed to maximise gains, which can be large on volatile assets such as commodities. However, you should be aware of the high risk involved, as leverage will also magnify your losses, if the asset price moves against your position.
Make sure you understand how CFDs work before you invest. Do your own research and always remember that your decision to trade should be based on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money. Never invest more than you can afford to lose.
Aluminium is largely driven by supply and demand. Higher vehicle and aerospace demand will likely support the market. Supply is also a key factor as disruptions in global mining operations and productions will also impact aluminium price. A weak US dollar will also be favourable to base metal as investors would be encouraged to seek alternative investment from safe-haven assets.
Whether the price of aluminium will go up will likely depend on 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 productions will also impact aluminium price.
The growing demand for aluminium as a light metal in vehicles has supported prices. Aluminium is seen as one of the key renewable metals in the transition to a greener and low-carbon economy. However, global supply has also outstripped demand. Whether it’s the right investment for you depends on your investing goals and portfolio composition. You should do your own research and never invest what you cannot afford to lose.