In today's story we see why aluminium prices are on the rise
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What’s the most used metal in the world?
Yeah, it’s not aluminium. It was a trick question. It’s iron actually — a metal used to make steel — an alloy that’s practically everywhere.
But Aluminium is a close second. It’s called the wonder metal and for good reasons. It’s light, it’s sturdy and is the preferred choice for engineers who build cars, aeroplanes, space shuttles and other electric appliances. But we are running short of aluminium. Global demand has skyrocketed and supplies haven’t kept pace. In the meantime, prices have been on the up. Back in February, Aluminium was selling at $3,250 per tonne. It’s expected to touch over $4,000 in the coming months. According to one report from Morgan Stanley, we could be witnessing a deficit of nearly 1 million tonnes of aluminium this year.
But why is this happening?
Why are aluminium prices soaring?
Well, like most things, Covid has a role to play here. When multiple countries across the world shut down for good, demand for aluminium plateaued. But then they were back up, chugging at a frenetic pace to make up for the lost time. Manufacturing and allied activities received a massive boost and the wonder metal was back in demand.
Only problem — This also coincided with China’s power crisis. A crisis precipitated due to a shortage in coal. Not following? Let us explain.
You see, China accounts for more than half of the global aluminium output. However, their factories are mostly powered using coal. Now, if you don’t remember, China witnessed a small blip in their coal production thanks to intense flooding in some regions. This forced Chinese authorities to start rationing power. It’s like this — If coal is powering a good chunk of the country, and you don’t have enough of it, then you have to make sure that it goes to places that truly need it. Aluminium manufacturing isn’t seen as an essential activity per se. So when the power rationing began, metal manufacturers were the first to feel the pinch.
And then to make matters worse, China also deliberately forced aluminium makers to scale down operations. The reason? China wants to become a carbon-neutral nation by 2060. And since over 80% of aluminium manufacturers still rely on coal plants, they are in the firing line once again.
Elsewhere, Europe is dealing with its own demons. The region accounts for more than 7% of the global aluminium production. But gas prices have been on a rise. In fact, according to one report by the World Bank, prices shot up by a whopping 550% from December 2020 to December 2021. And needless to say, the Russian invasion has made matters worse.
This is obviously more than a tiny hiccup.
Electricity represents 37% of the total production costs of primary aluminium smelters. And Europe already has one of the highest electricity prices in the world. This increased cost is crippling their aluminium industry. For instance, Alcoa, a major aluminium manufacturer has already stopped production (primary smelting) at a plant in Spain for 2 years. Meanwhile, another manufacturer Slovalco has planned to reduce its production capacity to 60%.
Then there’s Russia. Russia contributes nearly 5.6% of the global supply. But the country’s manufacturer, Rusal is having trouble sourcing bauxite — a key mineral used in the manufacture of aluminium.
Why’s that happening you ask?
Well, they source most of the bauxite from Guinea. However, with the sanctions in place, they’re having trouble keeping the operation going. And you know what? Perhaps India is one of the few countries that hasn’t witnessed massive disruptions in aluminium production. And we aren’t an insignificant player either. We are the second-largest producer of aluminium in fact and maybe this is an opportunity for us.
In the meantime, global demand is expected to remain robust. People will want more cars, more planes, more everything. And manufacturers will need more aluminium to keep pace with demand. According to one forecast, aluminium prices are expected to reach $4,399.87 a tonne in the next 12 months and may even hit $8000 in the next five years.
So yeah, this is a developing story and we will have to wait and see how the world navigates this rally.