Hold that Tesla! The inflation will be aluminum

The industry joke was that to make money in aluminum you had to sell in any price hike. No more. The fight against climate change – with its rush for the light metal coupled with the shutdown of the polluting energy sources that helped produce it – has upended the trade. It’s a crippling supply, especially in China. The result is the hottest aluminum market in 30 years.

Thrust is important precisely because of the ubiquity of aluminum in modern life. It is the most widely used non-ferrous metal, ahead of copper. And because it is everywhere, the rise in prices will also affect everywhere, adding to global inflationary pressures and eating into the margins of many manufacturing companies. Everything from government policy to central bank rates to what you pay for groceries will depend heavily on aluminum.

On the London Metal Exchange, spot metal prices jumped above $3,300 per metric ton for the first time since June 1988. Worse still, manufacturers are paying exorbitant surcharges above the LME price to procure physical metal. For example, European consumers of billets – a widely traded form of aluminum – face a premium of around $1,500 per ton, four times the average from 2000 to 2020.

It is unlikely that this is a unique case. In the past, traders would sell when prices rose above $2,500 per ton and buy if prices fell below $2,000 per ton; today they are still buying the metal as prices surged above $3,000 a ton. What was once a ceiling can now be a floor.

The main culprit is electricity. Turning bauxite into pure metal is an energy-intensive process. On average, producing one ton of aluminum consumes the same electricity that an average American family consumes each year. This is why aluminum smelters are located where electricity is cheap: Canada and Siberia, thanks to their abundant hydroelectricity, or Iceland, because of its geothermal energy. Over the past 20 years, however, China has become the preferred destination because of its coal-fired power plants, which provided ultra-cheap electricity — at the cost of polluting the planet.

Since 2005, China has accounted for almost all of the world’s additional aluminum smelting capacity, reaching a global share of almost 58% by 2021 in a market of 67 million tonnes. China is no longer increasing its fusion capacity because Beijing is trying to reduce both energy consumption and carbon dioxide emissions. Last year, China actually forced dozens of smelters to cut production to conserve electricity as the country faced shortages. The market is now waiting to see if any of these foundries restart after the Olympics.

In Europe, some foundries also reduced production at the end of 2021 due to ultra high electricity prices. Their return will depend on natural gas and electricity prices in Europe.

At the same time, demand is increasing, partly thanks to the fight against climate change. Aluminum is the metal of choice for making vehicles lighter – increasing mileage per gallon in internal combustion engines or extending battery life in electric vehicles. When Ford Motor Co. tried to make its popular F150 model more efficient, it increased the use of aluminum on its body, saving about 700 pounds (317 kg) in weight. For new aluminum customers, including the likes of Tesla Inc., a “we gotta have the metal” attitude is pushing demand even further.

Under these conditions, the aluminum market has moved to a deficit of more than one million tonnes in 2021, a trend that is expected to continue this year. The deficit is rapidly reducing inventories. In 2014, LME metal stocks peaked at nearly 5.5 million tonnes. At this point in 2022, they have fallen below 800,000 tonnes. Stocks in China and elsewhere are also down. CRU Group, a consultant, estimates that stocks would cover just 36 days of demand by the end of 2022, a record high.

Unless China restarts some of its domestic capacity – or a new smelter is built elsewhere in Asia – sooner or later, the market will have to drive down demand. Inventories simply cannot be reduced at the current rate any longer. With more rigid consumption than in the past, this will likely result in much higher prices. The last time the market had to ration supplies via prices to rebalance the market, spot aluminum jumped above $4,000 a ton. It is a valid point of comparison, 35 years later.

More from this writer and others on Bloomberg Opinion:

What if Goldman was wrong and a lone bear was right? : Javier Blas

Do not panic, Europe. It’s not inflation. It’s Just Gas: Marcus Ashworth

Gas at $3 a gallon isn’t as painful as it used to be: Liam Denning

(In 9th paragraph, corrects reference to F150 body.)

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He was previously the Commodities Editor at the Financial Times and is the co-author of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.”

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