Aluminium has nearly doubled in the past 18 months as surging demand from China, the world's biggest supplier, has pressured production. But the rise in aluminium prices is still modest compared with the recent surge in coal and electricity prices -- suggesting that soaring energy costs will put more pressure on global aluminium supplies and that prices, already at 13-year highs, could continue to strengthen.
Just a few weeks ago, it seemed that the surge in aluminium prices would trigger a global rush to reopen mothballed smelters. However, because aluminium smelting is energy-intensive, soaring global power and coal prices will make it increasingly difficult to restart or expand smelters. If the energy crisis worsens, some existing smelters could also find it harder to make money. The picture
The rise in aluminium (black) is still modest compared with the rise in electricity (blue) and coal (orange)
Citi estimates that Europe's highest-cost aluminium smelter could cost as much as $2,900 a tonne to produce after a surge in energy prices, which is already higher than current aluminium prices. The main aluminium contract on the London Metal Exchange was trading at $2,894 a tonne as of press time.
"I expect [smelter] restarts to be very limited," Tracy Liao, an analyst at Citigroup, said in an interview. "Aluminium smelter margins were at 10-year highs in some places before, but even then we didn't see substantial discussion about restarting idled smelters. And now, with electricity prices going up, it's even less likely."
With Europe's energy crisis set to worsen over the winter, aluminium smelters could also be at external risk of shutting down in the event of widespread blackouts in the future, he noted. China's aluminium industry is already struggling to supply due to seasonal power restrictions, and further blackouts elsewhere could send prices soaring and widen the gap between supply and demand worldwide.
"If power shortages widen further, aluminium smelters will obviously face significant cost increases or be forced to close if necessary, but that is not our base case at the moment." "The argument for cost inflation is more substantive, but the risk bias is to the upside, regardless," Liao says.
