What’s really driving aluminium prices

The West African nation of Guinea is often referred to as the ‘Saudi Arabia’ of bauxite since it produces about 23% of the world’s supply of the commodity—second only to Australia (26%). It is also among the world’s best quality bauxite, which is a primary ingredient used to make aluminium.

So when an elite faction of the military led by Colonel Mamady Doumbouya seized power on September 5 and arrested President Alpha Conde, the world, and those in the aluminium business in particular, took more notice of events in the tiny country of 13 million people than they might have otherwise. The international community condemned Conde’s overthrow—despite the fact that the 83-year-old president had manipulated the country’s constitution in 2019 to permit himself to run for (and win) a third term (lasting six years), provoking protests that were squashed by security forces leaving dozens of people dead.

Since the coup, prices for aluminium, a metal used in everything from cars, aerospace and construction to beverage cans, have hit a thirteen year high of US$3,000 per tonne.  They have pulled back in recent days to the mid-US$2,800s, but a sharp decline is unlikely in the near term.

But it turns out that the coup and the worry it will affect Guinea’s bauxite exports to China, the world’s largest aluminium producer, have had much less to do with the metal’s soaring price than structural issues in China including power shortages related to energy efficiency targets and President Xi Jinping’s goal of cutting pollution and putting the manufacturing juggernaut on the path to becoming carbon neutral by 2060. Aluminium production requires enormous amounts of electricity.

To get a better grasp of what’s really driving aluminium prices, I reached out to two experts from commodity market analysis firm CRU International, Gregory Wittbecker and Stephen Williamson. Wittbecker is a 37-year veteran of the sector who joined CRU as an advisor upon retirement from Alcoa where he worked as VP of industry analysis for fifteen years, and prior to that ran trading operations at Koch Metals, Cargill and Wise Alloys. Williamson, the other half of CRU’s North American aluminium team and research manager, also has worked in the aluminium industry for more than three decades including stints at Alcan, Commonwealth, and Arco/TriArrows.

Wittbecker noted that it is true China has been increasing its presence in Guinea over the last four or five years after Indonesia first imposed an embargo on bauxite exports in January 2014. Since then it has become a significant importer of Guinean bauxite, and last year imported 52.7 million tonnes, up 10.9% year on year. Nevertheless, China currently has a bauxite stockpile of 50 million tonnes—or about six months’ worth of imports — according to CRU, and so far there have not been any disruptions to major bauxite operations or to the ports.

As with most metals, Wittbecker says, China lies at the heart of the structural issues driving prices. “We’re seeing a significant curtailment of aluminium production in China short-term, due to energy shortages in the provinces of Yunnan and Guangxi,” he explains. “China has implemented this ‘dual control’ mechanism where they’re looking at the energy efficiency of a host of smelters in many provinces [and] there is an aggregate of nine million tonnes of smelting capacity under scrutiny having exceeded China’s energy consumption goals.”

China has also introduced a production cap on the metal that limits aluminium production to 45 million tonnes per year. “Right now they’re producing 40 million tonnes, but there is the expectation that China is deadly serious about capping that output, and re-engineering to secondary or recycled content. That means that the market outside China is going to have to be much more dependent on non-Chinese sources of export material.”

Not only do you have state-imposed energy shortages in the south, he says, which are forcing some smelters to curtail between 30% and 50% of their output, but Beijing may also come in and enforce some of its energy consumption targets in other provinces. What’s more, China has traditionally imposed controls on aluminium during the winter months to curb pollution. And as the host of the 2022 Winter Olympic Games, which start February 4, they are eager to ensure pristine, pollution-free skies.

At the same time, the world has worked off surpluses of aluminium that built up during the financial crisis, he says. “We’ve pretty much exhausted those inventories and we think the market will be in a deficit this year of over 1 million tonnes and next year we could repeat that deficit,” he says. “Barring any new supply, we’re likely to be flirting with deficits for the remainder of this decade.”

A lot of momentum behind the current price is thinking about the future, he adds, “and what does the incentive price have to be to get producers outside of China re-investing again in reopening idle capacity or building a new greenfield smelter. The current move to US$2,500 to US$3,000 per tonne is a function of the market trying to figure out how to triangulate what number it should be to incentivize people to build again.” In his view, that number has to be well above US$2,500 per tonne.

On the downstream side, Williamson notes that demand is increasing for fabricated aluminium products for everything from autobody sheets and beverage cans to travel trailers, and pleasure craft. “Virtually every aluminium consuming segment is experiencing year-on-year growth, even during the Covid period,” Williamson says. “It’s the perfect storm of supply and unprecedented demand dragging prices higher for bauxite and alumina to aluminum fabricated products.”

For beverage cans, he says, consumer preferences for cans rather than plastic bottles is driving aluminium demand, while for cars it’s all about light-weighting and carbon reduction. He cites statistics from DuckerFrontier illustrating that the North American auto industry has recorded an average mass increase of 32 pounds of aluminium per vehicle since 2016. The market research and advisory firm, forecasts that the total aluminium content per vehicle will grow from 397 lb. in 2015 to 471 lb. in 2022, about a 22% increase. And electric vehicles will require even more aluminium than conventional cars, Williamson says, to compensate for heavy battery boxes.