Follow The Aluminum Trail To Find Out The Limits Of Inflation

Aluminum is one of the most versatile metals and used in many sectors. Its evolution can anticipate the behavior of inflation in the medium and long term. And there is bad news: for the next few years a deficit is expected in the market that will keep the price high. Today in London marks highs of ten years and thirteen years in Shanghai.

For many years, China as the main producer of industrial metals has kept the price artificially low with an excess of supply . The pandemic and the fight to reduce harmful gases in the atmosphere has ushered in a new era for aluminum. It is perhaps the most widespread metal in life today. Its use is intensive in packaging, in industry with components in intermediate goods products, in construction and in technological products.

Nowadays, if we have to keep track of inflation, which is shaking the main economies, we must not take our eyes off the behavior of aluminum. Although many raw materials and metals have taken a breather in recent weeks, this is not the case with aluminum.

The three-month metal on the London Metal Exchange touched $ 2,726.50, rising nearly 3% , its highest level since May 2011. The most traded October aluminum contract on the Shanghai Futures Exchange it closed 1.2% higher at 21,390 yuan ($ 3,311.09) a ton , near its highest level since August 2008.

Experts are betting on a new era of aluminum, where the shortage of the product will predominate, as has been forecast for copper. But while the strong demand for copper comes mainly from the automotive sector, in aluminum it is more diversified.

In the short term, the rebound in the world economy after the pandemic and demand from the manufacturing and construction sectors have wiped out the stock that the market had. The sector has been characterized by an abundant production capable of absorbing the surges in demand. But Trafigura Group, the Swiss industrial metals trading giant, denounced that the economy is facing a deep supply shortage, with its epicenter in 2024.

“Aluminum requires a large consumption of electricity for its manufacture”

Prices have already begun to discount this situation somewhat, but until 2024 there is much to bet on such an accurate prediction. But behind Trafigura’s forecast are the certainties that aluminum will be one of the big winners of the green economy and that China, which accounts for more of the world’s aluminum production, is restricting supply to reduce its polluting emissions and meet the requirements. emission targets.

“Aluminum has a large carbon footprint as it is an electrointensive material, that is, it requires a large consumption of electricity for its production: about 15MWh for each ton of metal. To this is added that fossil energies are still used in 64 % of foundries, “explains Michael Widmer, an analyst at Bank of America. This scenario means that the excess supply that has dominated the market for more than a decade is disappearing, leaving buyers preparing for a new era of scarcity and higher prices, for many sectors.

The change in the market is 180 degrees. “It takes a big change in mindset; we were used to buying aluminum as if we were in a supermarket,” Philippe Mueller, director of commerce at Trafigura, explains to Bloomberg . “This is no longer going to work like this.”

For aluminum, the key is in China. The government began taking action in 2017, limiting smelting capacity to 45 million tonnes a year, and its subsequent carbon emissions targets have frustrated any expectations of increased production. “The government has gotten serious this time,” explains Alison Li, co-director of base metals research at Mysteel.

Goldman forecasts that the ton will reach 3,000 dollars

Actual production will reach around 40 million tonnes in China this year, so producers still have room to boost production for now, according to Goldman Sachs. But the industry is likely to peak in 2024 and the Chinese market will go into deficit thereafter. For the investment bank, this circumstance will cause more increases. By the end of next year, a ton of aluminum could be at $ 3,000, which would be a new record for the metal. At the moment, so far this year it has risen almost 30%.

Trafigura estimates that aluminum should reach $ 3,500 in the next year to mobilize investments to avoid the deficit for the following years. Producers outside of China would help balance the market with production increases, but prices will need to rise substantially for the investment to be worth it.

Logistical bottlenecks, higher transportation costs, as well as environmental taxes and tariffs are also at play right now, wreaking havoc on the market. United Co. Rusal International PJSC, the largest aluminum producer outside of China, is studying curbing orders outside the country due to a new Russian export tax.

The present is no less pleasant for factories or companies that need aluminum. “There is definitely a shortage because they are operating these plants at full throttle and there is no spare capacity,” says Greg Wittbecker, an analyst at CRU Group. The expert says that there are complications for beverage distributors to find cans. “In the US they are being imported from Brazil, Saudi Arabia and, from time to time, from Asia, and that is tremendously expensive because it is shipped by air.”

Rob Van Gils, CEO of Austria-based Hammerer Aluminum Industries, sees no truce for aluminum as customers purchase his specialty products even at near-record prices. Like many in the industry, Van Gils was forced to make big cuts in employee numbers and production when the pandemic hit, but plants are now back at full capacity and orders have never been stronger. “The entire supply chain is very stressed, from start to finish,” says Van Gils.