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Aluminum Prices Hit Decade High Amid China's Drive To Cut Carbon Emissions

Tyler Durden's Photo
by Tyler Durden
Tuesday, Aug 31, 2021 - 02:20 PM

Aluminum prices on the London Metal Exchange hit a 10-year high Tuesday, extending a year-long vertical surge as demand rebounds and supply shrinks, as smelters in top producer China faced tougher power controls, stoking supply worries for the energy-intensive metal. Benchmark three-month aluminum climbed 1.8% to $2,696 a tonne in official trading after touching its highest since May 2011 at $2,726.50, and rapidly approaching all time highs around $3,000.

In China, the most-traded October aluminum contract on the Shanghai Futures Exchange closed up 1.2% at 21,390 yuan ($3,311.09) a tonne, hovering near its highest since August 2008 of 21,550 yuan a tonne hit in the previous session.

Aluminum prices have been supported by production curbs in Chinese smelting regions often aimed at easing the strain on the power grid. The latest price surge comes as the government in China's Guangxi region, an aluminum and alumina production hub, on Monday called for tougher controls on energy consumption in a statement issued after a teleconference. The region is China's third-biggest producer of alumina, a primary product of aluminum, with output of 925,500 tonnes in July, according to the National Bureau of Statistics.

A stream of announcements from China about the challenges faced by smelters, combined with soaring global demand, have buttressed prices, said Wood Mackenzie analyst Uday Patel. China's production would still rise this year compared with last year, albeit at a slower pace, he said, adding that its output is about 500,000-600,000 tonnes lower than was expected at the start of 2021.

Meanwhile, Consultancy Mysteel said that eight aluminium smelting companies in Guangxi will have to keep their September production at a maximum of 80% of average monthly output in the first half of the year. That could equate to a reduction in annual operating capacity of 475,000 tonnes, it said.

"The impact of power and production restrictions in Yunnan is still expanding," Huatai Futures said in a report, adding the addition of other production areas to the list was not ruled out. Yunnan, as Reuters reminds us, is an aluminum hub and has seen some smelters forced to cut production due to power curbs this year.

The China Nonferrous Metals Industry Association held a meeting of top aluminum smelters on Monday to address what it described as an "irrational surge" in aluminum prices. Paradoxically, also on Monday, local government officials gathered to discuss cutting output of energy-intensive materials in response to Beijing’s campaign to save power and restrain emissions, according to people familiar with the situation. The meeting followed comments last week from Vice Premier Han Zheng, who called for nationwide curbs on industrial activities that produce too much pollution or fail energy-intensity standards.

The problem is that by further shrinking supply, prices will explode even higher. Amid the confusion, analysts are trying to forecast where the demand and supply curves - both of which are in constant flux - will settle:

"A slew of Chinese policies has recently come to affect aluminum output, pushing prices higher," Wei Lai, an analyst with TF Futures Co., told Bloomberg via phone. "Policies including the power consumption cap are expected to stay through the rest of the year. So the upside momentum remains for aluminum. Prices can hardly retreat as long as demand remains intact."

The metal, which has wide applications in everything from car pates, appliances, defense weapons, airplanes, and even down to the typical soda can, has faced strong demand since the pandemic after global central banks and governments unleashed trillions of dollars in stimulus. Goldman Sachs' Jeffery Currie told clients last week: 

As demand improves seasonally from September, aided by reduced lockdown effects and some probable supportive policy adjustments, we expect continued tightness onshore into Q4 and support for higher import volumes of refined metal. This fundamental setup will offer support for a trend higher in both copper and aluminum prices in particular.

Deutsche Bank's Liam Fitzpatrick expanded more on China's curtailment of power in industrial hubs that will impact metal outputs: 

Aluminum prices in China have reached the highest levels since 2007, reflecting a range of production disruptions, including emissions-related curtailments and power rationing. The tight power market and recent announcement from the NDRC that a number of provinces missed their power consumption targets in H1'21 increases the risk of further smelter curtailments/ramp-up delays later this year and in 2022. Earlier this month, the Chinese government issued the "Barometer of Completion of the Dual Control Targets" for energy consumption in H1'21. Five provinces with substantial aluminum capacity (~16 mt productions in 2021) received first-level warnings and will face pressure to reduce energy consumption for the rest of the year. 

China produces about 60% of the world's aluminum and output reductions suggest prices will remain elevated for the foreseeable future, further denting any hopes that the current price surge will be "transitory."

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