Aluminium prices have reached eye-wateringly high levels over the last few months on cuts in China’s output, rising energy costs and Ukraine tensions. All of these factors are here to stay in the first half of this year and will continue to affect prices over the coming months.
LME three month aluminium futures are hitting record highs of $3,302 a tonne, more than twice the 2020 low of $1,458/t and comfortably above the 2011 peak of $2,668 – the last time prices spiralled out of control. Since the start of this year alone, prices have risen by almost $400/t.
What is driving aluminium prices?
One of the key factors behind this rally is last year’s shift in China’s environmental policy. Climate action is one of a few things that China can currently still see eye to eye on with the West and an issue where China sees itself as a potential global leader. Because of that the country’s coal reduction targets will not be temporary and will keep affecting the production of aluminium for years to come.Aluminium is exceptionally energy-intensive with about 40% of the total cost arising from electricity use – not good news in a year when energy prices are spiralling. More than 80% of China’s aluminium production is powered by coal and as the country sought to close some of the heaviest polluters last year production has started to drop. The resulting cut in supplies is being felt across the global aluminium markets as China produces more than half of the world’s aluminium – 36 million tonnes in 2019 compared with India’s 3.7 million and Russia’s 3.6 million.
But there’s more at work here
This growing shortfall in production is being exacerbated by Russia and Ukraine tensions and concerns about how potential sanctions could affect exports of the Russian metal. Russia sells large amounts of the metal to Europe, China, Australia and the US, mainly for construction and electric vehicles production. Australia’s Macquarie Bank expects the aluminium market to be in a deficit of 1.72 million tonnes this year following a shortfall of 1.46 million tonnes in 2021. Inventories on the London Metals Exchange are already at much lower levels.
Going forward there will be some balancing out of the shortfall. With prices currently running at more than double the lowest level in 2020 some US production that has been mothballed during the worst of the pandemic is likely to come back on line. Also, some of the largest Indian producers are already looking to cash in on the price rises by increasing output by about 25% over the coming five years.
On the demand side, the construction boom in China is somewhat petering out but manufacturing of electric cars is booming, balancing out the decline. Electric vehicle production targets in Europe, the US and China will keep demand for aluminium strong over the medium to long term while population growth across the globe will also fuel construction growth, particularly in less developed countries. In the shorter term, the expected rises in electricity prices later in the spring have the potential to lead to further price spikes for this base metal.
WisdomTree Aluminium ETFs
| Product Name | ISIN | Exchange Ticker | Listing Currency |
| WisdomTree Aluminium Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi |
GB00B15KXN58 | ALUM | USD |
| WisdomTree Aluminium 2x Daily Leveraged Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi |
JE00B2NFTC05 | LALU | USD |
