For investors, the current aluminium futures chart doesn’t make for pretty viewing with electricity prices high and rising future supply issues gradually building up. The problem is global and is affecting most producing regions.
Aluminium is the most energy hungry base metal with a solid third of the cost of production made up by the cost of electricity. As global electricity prices are rising, and in some cases extreme weather is making a higher demand on grids, in some regions the input costs are becoming exorbitant.
This week Norwegian producer Norsk Hydro (NHY: Oslo) said it will stop producing aluminium at its smelter in Slovakia in September. Earlier this year major US aluminium producer Century Aluminum, (NASDAQ: CENX) had to idle its biggest US smelter in Kentucky while Alcoa struggled with plans to reopen its idled Intalco smelter.
Four dry rivers
Chinese aluminium production is also under pressure, particularly in Sichuan, one of China’s most inhabited provinces. Sichuan, which in translation means four rivers, is suffering from a record-breaking heatwave and droughts that are crippling its hydropower production. For more than two months the province has been limiting how much electricity industrial plants can use in order to ensure there is enough power for domestic use. One of the major local aluminium producers, the Henan Zhongfu smelter, has stopped output at several of its units.
China’s total aluminium production of 38.83 million tonnes dwarfs both the output in the US and Europe, at 3.88 million tonnes and the 3.3 million tonnes, respectively.
Rollercoaster price action
The war in Ukraine has created a year of two halves for aluminium futures, with prices shooting up from $2,800 a tonne before the conflict to a peak of $3,800/t and then gradually finding their way back to $2,410/t this week. On their way down prices fell below the level they were at last August, reflecting inflationary issues and slower growth in developed economies and the sharp economic contraction in China, the largest global buyer of metals.For the moment, aluminium prices seem to have incorporated expectation of a longer period of high inflation, rising interest rates and shrinking global economic growth. But they are not accurately representing what is happening on the production side and the fact that the output cuts are building momentum. Industry watchers expect to see more of those over the coming months, particularly in Europe where electricity prices are promising to become even higher this winter.
Unlike with other metals where it is relatively easy to restart production which has been suspended, this is not the case with aluminium, particularly if the closure is abrupt. In that case the molten aluminium solidifies and can destroy the actual production unit. If the closure is done in an orderly way, it is possible to restart output at a later stage, but the restart will involve additional costs.
In the months ahead aluminium prices will depend on how China’s economy will cope with the country’s strict zero Covid policy. Whether the domestic growth falls below the 2.5% it recorded in the first half of the year and if the government starts using the softer Covid rules introduced in several regional centres over the last few weeks on a country-wide level. Additionally, the wider production closures will provide a slow-burning level of support.
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 |
