Energy

China’s Power Problems Driving Boom-Time Prices For Aluminum


Power restrictions in China are doing wonders for the price of aluminum which at $2450 a ton remains within sight of its 10-year high of $2750/t set in 2011 and getting closer to its all-time high of $3000/t reached in 2008.

Once dubbed “congealed electricity” thanks to the heavy use of electric power in its three-stage production process from bauxite ore to alumina and then to the major electricity use in smelting into metal, aluminum is also benefitting from the near-record copper price.

The connection between copper and aluminum is that in some uses, such as power lines, they are interchangeable with the swap ratio generally seen as 3:1, that is when copper is three times more expensive than aluminum a change becomes financially attractive.

Right now, with copper a shade under $10,000 a ton the ratio is roughly 4:1 which is good news for aluminum producers such as Alcoa which has seen its share price more then double since late January when it was trading at $18 to last sales in New York at $38.62.

Substitution is, however, one of the lesser drivers in the price of aluminum with the biggest effects being strong global growth and problems in China were there’s a tussle underway between limiting pollution from heavy industries such as steel and aluminum production and boosting electricity production to meet strong local demand.

Even with the attacks on chronic environmental pollution China’s aluminum industry is expanding with Morgan Stanley, an investment bank, noting in a research report earlier this week that metal production had grown by 8% in the 12-months to date with an estimated four million tons of annual capacity added and another 800,000 tons of mothballed capacity restarted.

Some Capacity Still In Mothballs

Offset against the expansion is the inability of another 1.1m/t of smelting capacity to restart because of restrictions caused by power shortages, a key factor in driving the worldwide aluminum market into deficit.

Along with low rainfall in the catchment areas of hydroelectric dams there is a China-wide shortage of coal for power generation, a curious state of affairs given that there are coal carriers fully-laden with Australian coal sitting at anchor off Chinese ports but banned from unloading because of a trade spat between the two countries.

Morgan Stanley said that in April hydro-electricity was 11% below 2019 levels in Yunnan province, a major energy exporter to the rest of China as well as being the site of a big expansion in aluminum production with three smelters in 2019 expanding to eight today.

“Guangxi, Shandon, Sichuan, Jiangsu, Zhejiang and Guangdong are also impacted by power shortages,” Morgan Stanley said.

The bank said that in the near term, the impact of China’s power shortfall would extend would to the global market through China’s need to import between 100,000-and-200,000 tons of aluminum a month.

“But there are longer term implications too; Yunnan’s capacity to enable further growth in aluminum smelting capacity appears limited (at least in the near term) putting a further two million tons per year of potential capacity at risk,” Morgan Stanley said.

Expansion of scrap recycling will help, the bank said, but this will take time and until more scrap becomes available China’s demand for imported metal is likely to persist, and smelting costs will rise, underpinning global aluminum prices.



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