Aluminium prices likely to remain volatile as energy issues persist

Aluminium prices have plunged by 14 per cent from the multi-decades high of $3,198 a tonne witnessed on October 18, but the volatility in the aluminium market will likely continue as energy consumption constraints persist, according to rating agencies.

Though prices are expected to ease in the coming months, they are projected to remain at elevated levels as the shift to the green economy will support the metal’s prices.

After dropping from the highs seen last month, aluminium prices are hovering in the $2,700 range. On Tuesday, the LME three months contract was quoted at $2,698.

Major inflection point

Dutch multinational financial and investment services firm ING’s economic and financial analysis arm Think said, in a note, that the high aluminium costs are here to stay as smelter margins have collapsed and escalating energy costs have become a major inflection point of smelting costs. As a result, producers’ margins have dropped.

Fitch Solutions Country Risk and Industry Research (FSCRIR), a Fitch group unit, said in its note that producers around the world resorted to cutting back on production in view of the high energy costs, which make up approximately 40 per cent of the total production cost.

ING Think Senior Commodities Strategist Wenyu Yao said aluminium prices have dropped from the October 18 highs as speculative bets have been withdrawn from the market ahead of some major macro events.

Signs of easing

Yao said major energy costs inputs have come off significantly, a sign of the power crunch easing. “In China, strong policy intervention from Chinese policymakers sent thermal coal prices into a free-fall,” she said, pointing to the nearly 60 per cent fall in thermal coal prices traded on China’s Zhengzhou Exchange.

Onshore inventories were building up faster than expected and this has turned the focus on demand uncertainties in China, where the slowing economy due to property slowdown, Covid outbreak and power crisis has caused concern.

Fitch Solutions said despite expectations of aluminium rates easing, it was raising its price forecast for this year and next to $2,450 and $2,300 from $2,300 and $2,100, respectively.

Dropping to economic levels

“First, the continuing global economic recovery will support aluminium demand through robust manufacturing activity. Outside of China, recoveries from contracting construction industry values and vehicle production will bolster aluminium demand across major aluminium consumption markets in 2022,” FSCRIR said.

Fitch Solutions and ING Think said aluminium prices had begun their journey north from the second quarter last year to the third quarter this year. Besides, China’s severe power crunch led to aluminium smelters being ordered to limit or halt production in order to reduce the pressure on the power grid.

“Nevertheless, production declined year-on-year during July-September 2021. After an intense government crackdown on coal hoarding and speculative trading in China, coal prices have declined to levels that make it economical for power providers to produce electricity, reducing the need for power rationing or lowering power consumption,” Fitch Solutions said.

Winter challenges

ING Think said a 20 per cent rise in power cost would lead to a seven per cent increase in production costs. Though some provinces such as Guangxi are set to slap a 50 per cent premium on power charges.

Fitch Solutions said energy supply would be a challenge for the Chinese aluminium sector as the winter is approaching and Beijing continues its decarbonisation strategy.

Prices will slip in 2022 as global demand growth would taper off after this year’s robust recovery. However, demand fundamentals and supply concerns will support prices, FSCRIR said.

On the other hand, the coup in Guinea has the potential to lead to bauxite shortage, besides continuing diplomatic tensions between Australia and China.

ING Think said with production costs rising sharply, aluminium supply growth looks unsustainable if prices stay at current levels.

Fitch Solutions said sustainability has become the top of the mind this year beyond, but low-carbon aluminium presented a future risk to aluminium pricing.

COMMENT NOW