Wednesday, January 19

Global energy crisis increases pressure on aluminum supply

Aluminum jumped to its highest level since 2008 when a deepening energy crisis squeezes supplies of the energy-intensive metal used in everything from beer cans to iPhones.

Industry insiders like to joke that aluminum is basically “solid electricity.” Each ton of metal requires roughly 14 megawatt hours of energy to produce, enough to power an average UK home for more than three years. If the 65 million tonnes per year aluminum industry were a country, it would rank as the fifth largest energy consumer in the world.

That meant aluminum was one of the first targets in China’s efforts to curb industrial energy use. Even beyond the current energy crisis, Beijing has imposed a strict cap on future capacity that promises to end years of excessive expansion and increases the prospect of deep global deficits. Rising energy costs in Asia and Europe mean there is a risk of further supply outages, and some investors are betting that prices have much more to go.

Aluminum rose as much as 3.3% to $ 3,064 a ton on the London Metal Exchange on Monday, the highest level since July 2008, leading broad gains among base metals. Copper gained 1.9% while zinc rose to $ 3,230 a tonne after gaining 2.5% during the session.

For investors looking to bet on a future increase in the price of aluminum, LME option contracts offer a popular way.

In recent weeks, investors have been buying calls with strike prices as high as $ 4,000 a ton, according to traders active in the market, effectively betting that prices could move significantly beyond that level to new all-time highs.

“It feels a lot like a structural hedge fund game,” said Keith Wildie, chief operating officer at Romco Metals, who has been trading LME options for more than 20 years. “What they are positioning themselves for is a significant market dislocation and a strong upward movement in price.”

As the global metals world prepared to meet in London for the annual LME Week, signs of pressure on the aluminum industry have continued to mount. China’s State Council announced on Friday that it will allow higher energy prices in a bid to ease the worsening energy crisis. In the Netherlands, aluminum producer Aldel will reduce production starting this week due to high electricity prices, Dutch broadcaster NOS reported.

Several aluminum plants in China are being suspended and the country’s production is likely to have peaked, at least in the short term, said Mark Hansen, chief executive of London-based trading house Concord Resources Ltd. With the market in deficit and needing to stimulate investment in new production outside China, prices could reach $ 3,400 a ton in the next 12 months, he said.

Next, traders and analysts say, investors are on the lookout for a possible impact on Chinese aluminum exports. With its own production under pressure and demand booming, the country has been importing increasing amounts of primary metal. However, it continues to export large volumes of semi-finished aluminum, partly supported by tax rebates.

“Given the severity of the power shortage and the cuts we’ve seen, it just doesn’t seem rational that China is exporting that volume of aluminum products every month,” James Luke, Schroders commodity fund manager, said by phone. . From london. “It is essentially a net export of energy resources.”

Analysts, including Goldman Sachs Group Inc., say there is a possibility that Beijing will reduce or eliminate value-added tax rebates on exports to slow the flow of metals beyond its borders. Given that China is likely to continue to import large volumes of aluminum next year, that could leave the rest of the world desperately short and increase the risk of a violent rise in prices.

On the other hand, prices received an additional boost on Monday after the European Union imposed an anti-dumping duty on China’s flat-rolled aluminum, although it initially suspended the duty for nine months and excluded some key materials, including the metal used by the company. beverage, automobile and aeronautical industries.

This year’s surge in aluminum prices would typically lead producers elsewhere to reopen old plants and consider adding new supplies. However, the even bigger increase in energy costs is putting pressure on foundries and can make restarting difficult.

For example, if a smelter in Germany were exposed to one month’s base load rates for energy, it would have to pay around $ 4,000 for the energy required to produce a ton of metal, far exceeding current aluminum prices.

“The global metals market in 2022 will be the narrowest it has ever been,” said Eoin Dinsmore, head of aluminum primary and product research at CRU. “The rest of the world cannot deliver these amounts to China indefinitely.”

© 2021 Bloomberg

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