Aluminium has been the second-strongest performer of the base metals this year (behind tin), with the London Metal Exchange three-month price gaining 51% from where it was at the end of last year, reaching the intraday high of $3,000 per tonne in September. The main reason behind the rally was the emergence of strict and widespread energy usage restrictions in China and the resulting smelter production disruptions there.
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For example, in August, Changji prefecture in the Xinjiang region imposed output limits on five aluminium smelters, which we believe had to reduce operational capacity by almost 450,000 tonnes as a result.
Then in September, the government of Guangxi autonomous region also issued a circular requiring all aluminium smelters within the region to control their electricity usage.
In addition, in Yunnan, the provincial government announced a requirement that all smelters in the province using green-sourced energy keep their average monthly output in September-December at or below August levels to reduce carbon emissions.
We believe production disruptions like these in China should continue to cap aluminium supply, even in 2022 – which will maintain this supportive element to price sentiment into next year.
On the demand side, growth has exceeded expectations this year, and we believe the strong increase from the transportation sector – especially against the backdrop of lightweighting and new energy vehicles – should become the new bright spot for aluminium demand.
But the largest aluminium consuming sector – building and construction – may start to experience a slower growth rate due to the uncertain outlook for the highly leveraged Chinese property market, as well as to Beijing’s shifting economic growth model from real estate to high technology manufacturing and green technologies.
Looking into 2022, we expect the global aluminium market to see a deficit of 1.334 million tonnes, compared with 2021’s 498,000-tonne deficit. This is thanks to resilient global demand and supply constraints in China.
Overall, we are still bullish on the aluminium prices in the medium to long term, and we believe a new all-time high cannot be ruled out for LME aluminium prices in the coming months and quarters.
What buyers are saying
- Consolidation is expected with the LME three-month aluminium price trading at $3,000 per tonne, and first-quarter aluminium billet premiums above roughly $1,500 per tonne in Europe.
- Although downstream demand remains strong, it is becoming harder and harder to pass down high aluminium prices and premiums down the supply chain.
- Buying at record high premiums and prices poses a risk from carrying massive stock into 2022.
- Downstream bottlenecks in industries such as automotive could create volatility, shocking demand during stoppages and assembly line restarts.
- Freight remains a key driver of premiums. Containers remain difficult to book, which keeps supply from flooding benchmark markets in the United States, Europe and Asia.
- China remains the strongest destination for metal, with smelter cuts in the country expected to continue drawing international supply of aluminium there.
- Aluminium production costs remain high: alumina, silicon, magnesium and energy prices continue to climb.
- Commodity-grade aluminium supply is expected to remain low, especially with producers focusing on producing value-added products.