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Daily Intelligence Briefing

Thursday, October 14, 2021

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Global Power Constraints Lead to Aluminum Production Cutbacks, Supplies Stay Tight

Summary: Aluminum prices just soared to a thirteen year high, primarily due to a burgeoning energy crisis gripping the world, worrying analysts that an ongoing supply crunch could worsen. The energy intensive metal has seen its production curtailed recently as many countries continue to prioritize clean energy initiatives. Supply constraints are likely to affect a wide range of industries, including semiconductor manufacturers and homebuilders.

Without a quick fix for the global energy crisis, aluminum supply is forecast to sink into an even deeper deficit after decades of oversupply, potentially leading to higher prices over throughout the next few months.

Related ETF & Stocks: iPath Series B Bloomberg Aluminum Subindex Total Return ETN (JJU), Alcoa Corporation (AA), Century Aluminum Company (CENX), Aluminum Corporation of China Limited (ACH)

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Aluminum Costs Surge Amid Global Power Constraints

Aluminum, an energy-intensive metal found in everything from smartphones, airplane parts and window frames, has been in high demand as the global energy crisis shocks markets. Robust demand and dwindling supply have caused the price to surge to a thirteen-year high, with potential for more upside ahead.

MRP has recently highlighted how the energy crisis has driven natural gas prices to record highs, sparking renewed interest in coal as an energy source. Similarly, aluminum production cutbacks have made the metal the latest commodity to experience skyrocketing prices, as costs have jumped roughly 48% year to date.

Aluminum has become a surprise beneficiary of the energy shortages currently ripping across both Europe and Asia. Industry analysts jokingly call aluminum “solid electricity” due to the fact that one ton of the metal takes 14 megawatt hours of power to produce, enough energy to power a home in the UK for nearly three years, per Bloomberg.

One of China’s first priorities in an effort to curb industrial energy usage was setting a hard cap on future aluminum capacity, something that set the stage for supply deficits even before the current energy crunch. AgMetalMiner writes that 2.33 million tons of smelter capacity have already been taken offline due to Beijing’s decarbonization goals, and that new production is not expected to come online until late 2022, at the earliest.

Aluminum prices recently broke the $3,000 per ton threshold on the London Metal Exchange, the highest mark since July 2008. The commodity’s run up typically causes producers to bring more supply online to balance markets, yet that has been far from the case. Bloomberg reports that production in China has stalled due to seasonal power constraints, and with the European energy crisis set to drive power prices higher this winter, aluminum smelters are very unlikely to restart operations.

In a worst-case scenario, industrial power blackouts take hold in Europe and take aluminum production completely offline. According to Reuters, Dutch aluminum maker Aldel has already halted production of primary aluminum due to current high electricity prices. Additional smelters could follow suit if energy prices continue to trend higher.

The ongoing energy crisis raises concerns that the transition to renewables will experience consistent speedbumps, as fossil fuels have already been brought back to life in some capacity while clean energy initiatives accelerate. Bloomberg notes that demand for renewable energy and electric vehicles is set to soar over the next few years, and efforts to minimize the aluminum industry’s carbon footprint could be the end of a decades-long supply glut.

Demand Forecast to Grow, Creating a Slew of Headaches

While supply constraints are driving prices higher, demand for aluminum has also rebounded from the depths of the pandemic as the global economic recovery begins and production of everything from consumer goods to electrical components advances.

Industries affected by elevated aluminum costs include semiconductor companies, solar manufacturers, and homebuilders.

TechSpot recently reported that aluminum capacitors, a component used in electric vehicles and computers, are forecast to be in short supply in the coming months, adding further strain to semiconductor manufacturers. Shipments of aluminum capacitors from Malaysia could decrease anywhere from 30 to 60%, primarily due to COVID-19 disruptions, keeping aluminum hard to come by.

In the solar industry, aluminum is a critical component in the production of solar panels. PV Magazine writes that aluminum producers in the solar supply chain in China have been forced to operate just two days a week as China continues to conserve power across the country. It’s unlikely smelters will restart operations in the near future.

Meanwhile in the United States, homebuilders and construction companies have been dealing with supply chain headaches due to aluminums supply deficit.

MRP recently highlighted the resurgence of lumber demand across the country, yet it now appears there are several other materials creating problems for the construction industry. Fox News reports that aluminum prices are up 73% from their pandemic lows, noting that the material is integral in HVAC installation, siding, gutters and insulation across residential homes.

Further, elevated building material costs have been a constant concern for homebuilders. Aluminum material specifically has increased 15-25% since the onset of the pandemic, per Fox 5 NY. The shortage of aluminum has slowed home construction in certain regions as well, as WNCT writes that longer wait times for gutters and window frames have delayed new home projects across counties in North Carolina. It may just be a matter of time before other regions experience slowdowns due to disruptions in the aluminum industry.

With shortages unlikely to subside any time soon and demand steadily rising, the price of aluminum certainly has potential to move higher off its thirteen year high. The current energy crisis has no quick fix, meaning the energy-intensive metal should see additional production cuts as clean energy initiatives in both the solar and electric vehicle industries accelerate. With aluminum forecast to remain in high demand across multiple sectors, the supply crunch could last well into 2022.


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