Global aluminium prices are set to rule firm in the short-term on the back of a volatile energy market and uncertainties in the European power market preventing producers from signing a competitive power deal.

The non-ferrous metal has gained over six per cent since the start of the year and nearly 15 per cent over the past month as high power tariff has affected supply with aluminium’s fundamentals looking strong. Prices are, however, lower than the 13-year high of $3,221/tonne witnessed on October 15 last year.

Aluminium production results in an enormous consumption of power. About 17,000 kWh of electricity is required to produce a tonne of the metal.

‘Deeper deficit’

 Aluminium was offered at $2,977.50 a tonne for cash last weekend on the London Metal Exchange (LME), while the three-month contract was offered at $2,998. On Shanghai Metal Exchange, aluminium for delivery in March was quoted at 21,185 Chinese yuan ($3,338.43) a tonne on Monday. 

In its outlook, Dutch multinational financial services firm ING’s economic and financial analysis arm Think said the current problems in the power market may lead to aluminium slipping into a “deeper deficit”. 

“With low gas storage and high volatility in the gas market, many uncertainties surround the European power market. It would be tough for smelters to secure a competitive power deal in this market,” ING Think said. 

US research agency Fitch Solutions Country Risk and Industry Research (FSCRIR) said the power issues that affected China during the last quarter of 2021 will continue during the initial parts of this year. 

Demand to improve

Fitch Solutions said additional supply growth in primary aluminium relies heavily on the rest of the world but access to cheap and clean power supplies are determining factors for “sustained supply growth” from existing projects and new supply in future. It said only a limited capacity will come online this year. 

Shanghai Metal Market (SMM) said with infrastructure investments likely to increase in the first half of 2022, demand for aluminium will improve. It said the focus on new energy vehicles and the photovoltaic sector will also buoy aluminium demand. 

ING Think said optimism over strong demand has been fuelled by hefty cancellations of LME warrants that could result in a large outflow of stocks. Inventories have continued to decline and last week, they dropped to 790,000 tonnes, far below the five-year average. 

Supply-side concerns

European producers are still affected by high power costs and no solution seemed to be in sight, the Dutch financial services think-tank said, forecasting a deficit in the aluminium market this year. 

SMM said supply-side concerns for aluminium include carbon peaking and carbon neutrality strategy of China that could curb aluminium capacity, but the overall situation would improve compared with last year.

Fitch Solutions said China’s “dual-control” mandate of energy intensity and total energy consumption are disrupting aluminium supply and the energy crises witnessed in the last quarter of 2021 in Europe and China affected growth in supplies.

The power problems resulted in China’s primary aluminium production growing by just three per cent against initial estimates of eight per cent. “And Chinese ‘green’ policies are detrimental to the timing and scale of restarts and whether those uncommitted projects will actually be given the go-ahead,” the research agency said.

In November last year, Fitch Solutions raised its forecast for aluminium prices this year to $2,300 from the earlier $2,100. SMM said it expects the metal’s prices to rule between $2,340 and $3,230 a tonne throughout 2022. The Chinese firm said aluminium prices will follow an “inverted V pattern”. 

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