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A recovering market set to get stronger

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While it has not been without challenges, the global aluminium market is clearly well on the road to recovery after the hit that it – like most markets – took last year from the Covid-19 pandemic. The aluminium market has been very volatile over the past several years, Trond Olaf Christophersen, head of recycling for Norsk Hydro, pointed out, with it going from a very strong market in 2017-18 before it weakened and went into shock with the pandemic in 2019-20. “But since last summer we have seen continuous recovery,” he observed.
Ryan McKay, a commodity strategist with TD Securities, said that, broadly, aluminium demand has recovered back to pre-pandemic levels. He said this is mainly due to the strength of demand in China and the United States, given that demand from some other major regions, such as Europe and Asia, outside of China, remains below that in 2019.

The market is generally expected to continue to improve, both from a demand and from a pricing perspective, with Yang Cao, a senior metals analyst for Fastmarkets MB, predicting for the year as a whole that global aluminium demand will likely see 6.7% year-on-year growth, including a 5.3% rise in China and a 9.0% increase in the rest of the world, coming at the same time as aluminium prices remain elevated – at least for the rest of the year.

“It would have been strong this year anyhow with aluminium being used in such a wide variety of strong end-use markets, including consumer products and building and construction,” independent metals consultant Robin Bhar said, but he attributes much of the growth to the major global economies emerging from last year’s pandemic-related lockdowns.

“While price performance in January was slow, the global aluminium market is now really roaring back,” Geordie Wilkes, head of research for Sucden Financial, said, noting that while there is starting to be some moderate softness in the auto sector due to the shortage of semiconductor chips, most aluminium end-use markets throughout the world are quite strong, with overall aluminium consumption up by about 7% year on year.

From surplus to deficit

“The big story is that the global aluminium market has moved from surplus to deficit,” John Mothersole, director of IHS Markit’s pricing and purchasing service, said. According to Sergey Donskoy, a metals and mining analyst for Société Générale, after a very long period of ample supply, the aluminium market might be moving into a new era of deficits. This, noted John Tumazos, president and metals analyst with John Tumazos Very Independent Research, comes with aluminium demand increasing robustly – more rapidly than production.

Mothersole said this is helped by China, which, while being the first economy to feel the effects of the pandemic, has bounced back very quickly and to such a degree that it has been supporting the global market.
Starting in the second half of last year and carrying into early this year, China led the way into aluminium’s recovery, Wilkes said. “But, as was to be expected, recently we have started to see some moderation of China’s growth year on year,” he added, explaining that this was not just because China was doing so well this time last year, but there has also been some easing of Chinese industrial production activity over the past few months with year-on-year growth figures moderating.

But Wilkes said that over the longer term the push in China and elsewhere in the world for the green economy – including lighter weight vehicles and renewable power sources – will eventually have a positive impact upon aluminium demand.
Hydro’s Christophersen made a similar point, noting that aluminium is seeing a boost in demand from its use for solar and wind energy components, and with aluminium gaining market share in some wire applications with the growing price differential between copper and aluminium.

Chinese demand is key

Fastmarkets’ Cao said one thing that has been driving Chinese aluminium demand is its investments in real estate, which, according to the China’s National Bureau of Statistics (NBS) was up 15% year on year for the first six months of this year, including a 3.8% increase in the real estate floor-space starts and a 25.7% year-on-year increase in completed floor space. This benefited aluminium significantly, Cao said, given that it tends to have greater usage in the final stages of construction projects.
Cao said that, after a strong first half, aluminium demand from China’s building and construction sector will likely slow down due to lackluster fiscal spending. He explained that China has been looking to reduce hidden local debt risks associated with the country’s local governments, which has led to decreased fiscal infrastructure spending. In fact, according to NBS data, China only issued RMB 1.014 trillion in new local government special bonds in the first half of this year, which is only 28% of its annual quota, compared with spending 60% of its quota for the first half of 2020.

But to keep funding from flowing into the property sector and to keep hidden debts from rising further, China has tightened its standard for the issuance of these bonds, which Cao said, could result in the country’s infrastructure investment growth rate in the second half of this year slowing and a year-on-year decline in Chinese aluminium demand from that sector.
Overall, Donskoy said that he does not see any obvious signs that aluminium demand is weakening in China, especially given that China’s inventories had been declining until August. “While recent stabilization of inventory levels raises some questions, it is not out of the ordinary, considering seasonal patterns in Chinese aluminum consumption”, he said, adding that the fact that China keeps importing significant amounts of aluminium suggests that it is still a struggle to meet their demand through domestic production, partly due to the electricity rationing in some regions of the country, which has resulted in the idling of some smelters.

He noted that China’s aluminium demand has been up over the past several months, partly due to the nation’s accelerated investment in renewable power generation, as well as increased demand for electric vehicles (EVs), which contain more aluminium (up to two to three times more aluminium by some estimates) than internal combustion engine (ICE) vehicles. As Bhar pointed out, China has been leading the way globally with increased EV sales and production, although Europe has been catching up.

The US has the potential to make up some lost ground, Cao said, noting that President Biden recently unveiled plans to make half of the new light vehicles sold in the US by 2030 zero-emissions vehicles, including battery electric, plug-in hybrid or fuel-cell EVs. This will support aluminium demand as not only will aluminium be increasingly used to lighten the weight of these vehicles, compensating for the weight of the battery through its use (much like that in ICE vehicles) for auto bodies, doors, trunks, hoods, heat exchange, chassis, etc., but also for the battery packs and enclosures.

TD Securities’ McKay, however, pointed out that while the auto sector, and aluminium demand from that sector, had recovered well, recently it is starting to have some negative impact from the global semiconductor chip shortage. But he added that could prove to be artificial weakness since once the chip shortage is alleviated and auto supply chains recover, there could be pent up demand for aluminium.

Ex-China demand rebounds

While outside of China aluminium demand had been relatively weak, Mothersole said that recently it is rebounding both in Europe and North America across virtually all end-use markets, which he largely attributes to inventory restocking reflecting a change in companies’ business philosophy from just-in-time to just-in-case inventory management in reaction to problems they are having securing material.
While remaining, by many estimates, at least 3-4% below pre-pandemic levels outside of China, the expected year-on-year increases for 2021 are pretty impressive. For example, Wilkes said European aluminium demand is expected to be up by 7.2% in 2021, with the construction sector being the highlight of European aluminium demand, although he said that growth rate could moderate somewhat next year with some prices increasing over the past year at the same time as some governments have reduced their stimulus payments. He also observed that currently US demand for flat-rolled aluminium products is up about 14% and that US demand for extruded products is up about 21% year-on-year.

According to a spokesman for the Aluminum Association, US net new orders were up 24.2% year to date through July, with the largest issues being for companies getting enough workers to meet this strong demand.
Aluminium prices have really been rallying this year, rising by over 30% year to date to a 10-year high, with LME prices fluctuating over recent months between $2,500 and $2,600 per tonne, which is much higher than its $1,424 per tonne low at the height of the pandemic in April 2020. While both have contributed, market observers say that rally has been much more supply than demand driven.

The catch-up effect from the pandemic has resulted in some challenges for the aluminium supply chain, Hydro’s Christophersen noted, particularly those related to logistics issues with the tight availability of shipping containers.

Also, while the initial supply response to the demand recovery was actually quite good, with some aluminium producers restarting some of the smelters that they had idled, Bhar said this year supply tightened. That was partly because China, the world’s biggest aluminium producer, cut back some of its production due to the imposition of environmental restrictions by its government.
This, Tumazos said, comes in a time of evolving environmental consciousness leading to changes in the composition of the electric grid, which forces primary aluminium, which takes 6-7 kilowatt hours per lb. of electricity to produce, to compete with the new demands for electricity, including the electrification of light vehicles and other transportation equipment.

Mothersole pointed out that the Chinese aluminium industry has been hit both by a need to control energy consumption and to reduce emissions, which led, not only to a clampdown in production capacity expansions, but, in some cases, power levels being reduced to the industry. For example, earlier this year there were certain restrictions placed on electricity supply that resulted in an about 100,000 tonne cut in aluminium production in China.

That, Mothersole said, had been compounded by drought conditions in Yunnan province, which uses a lot of hydropower, and has resulted in cuts in electricity allocations to certain businesses, including aluminium smelters. But given that these weather conditions have since normalized, Ryan said it is possible that the smelters in Yunnan could step back up their capacity soon.

Future supply constraint?

Meanwhile, while there have been a few new smelter projects here and there, including in Russia, where Rusal has a couple of new projects, Tumazos said there has been limited capacity growth over the past 10 years, with several major producers, including Rio Tinto, Alcoa, Chinalco and Hongqiao, withdrawing some of their smelting capacity.
It is unknown if there will be enough aluminium supply next year to meet everyone’s requirements, Donskoy said, noting that it depends upon whether China restarts some of its idled smelters later this year. If so, the aluminium market could become more balanced. Fastmarkets’ Cao noted that while several long-term idled smelters in northwest China were due to resume operations in the third quarter of this year, encouraged by the strong aluminium prices, their outdated facilities are taking longer than initially anticipated to upgrade. He said that he expected that total global aluminium production will increase 3.7% this year, including a 5.6% increase in China and a 1.3% increase in the rest of the world.

Meanwhile, aluminium inventories on both the LME and the Shanghai Futures Exchange continue to fall. Cao said that, as of July, LME stocks were 2% lower than they were at the end of last year and SHFE inventories had fallen 34.7% from this year’s April 9 high.

“Aluminum deficits will keep aluminium prices significantly above costs and will likely drive at least some more investments,” Donskoy said, although any capacity expansions outside of China will be expensive and slow coming.
Given that, and the push for sustainability, Tumazos said that even though the conversion is not all that easy to do, he expects that much of the new aluminium supply in the next few years will come from recycling. Bhar said it has been forecast that by 2050 recycled aluminium could account for 50% of global aluminium supply, up from about 20% currently.

“Our smelters are using more scrap metal, including post-consumer scrap,” Hydro’s Christophersen said, attributing this growing trend to both scrap availability and the growing desire for green solutions, including the use of products with increased recycled content.
While it could correct slightly starting later this year, or early in 2022, as the ‘sugar high’ from the stimulus from various governments starts to wear off, McKay said the aluminium market should continue to have a strong year this year with prices remaining elevated, albeit possibly down slightly from current levels.

Christophersen agreed, noting that the recent strong recovery of aluminium prices and record premiums in North America and Europe is a clear demonstration of the tightness of the aluminium market. “But while we are seeing very strong recovery in the aluminium market this year, we probably won’t see as high growth rates going forward given that demand is currently catching up from last year’s pandemic lockdowns,” he said.

But even though aluminium prices could weaken somewhat next year, Donskoy said they could pick up again by 2023 or 2024, given that there is not much new aluminium smelting capacity being built.

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