Aluminium price slump ‘nearing a bottom’ as clean energy demand rises
Metal has fallen 40% from last year’s high amid worries about global growth
A slump in aluminium prices this year reflecting a global economic slowdown may be “nearing a bottom”, according to traders, producers and analysts, who are growing increasingly bullish about demand for the metal from burgeoning clean technologies.
The aluminium futures benchmark on the London Metal Exchange has fallen nearly a fifth since its January peak, and more than 40 per cent from last year’s highs — largely due to economic weakness in Europe and the US, and poor construction demand in China.
But many producers and traders are growing increasingly bullish in the medium-term, forecasting growing demand for the metal from makers of electric vehicles and solar panels. Aluminium prices this month experienced their largest contango since the financial crisis, meaning metal bought today is at a discount to future prices. This reflects weak spot demand, as well as the expectation that future prices will be higher than today.
“I think we are nearer the bottom of the price cycle [for aluminium],” said Colin Hamilton, analyst at BMO. “If demand continues to improve over the coming weeks, we may be past the nadir in 2023 pricing.”
The benchmark three-month future contract on the LME is currently about $2170 a tonne, down from more than $3,840 a tonne at last year’s peak.
One trader at a large trading house expects prices to bottom at about $100-$150 from their current levels, and rise in the long term.
Used in everything from buildings, beverage cans, solar panels, automobiles and aeroplanes, aluminium is often a proxy for industrial activity.
“We are having a cool-down of the economy, and aluminium products are very closely linked to GDP across the globe,” said Pål Kildemo, chief financial officer at Norsk Hydro. “Europe is driving the weakness in demand,” he added.
The company, which is the fourth-largest aluminium producer outside China, has pushed back its forecast for a recovery in demand, which it now expects in the first quarter of 2024 at the earliest.
Likewise, consultancy Cru has lowered its global consumption forecast for this year and next, saying that prices have further to fall, while several major banks have cut their price forecasts in recent weeks.
“There is a global surplus of just over 800,000 tonnes this year, and this is weighing on the price,” said Ross Strachan, aluminium analyst at Cru. “All the major regions are seeing softer than expected demand growth.”
But there are also signs that the gloom may be beginning to lift, as a period of running down global aluminium stocks appears to be coming to an end.
China, the world’s biggest producer and consumer of aluminium, has emerged as a relative bright spot, as growing spending on clean energy infrastructure compensates for waning appetite in the highly indebted Chinese property sector.
“Chinese demand is running at a record high,” said Graeme Train, head of metals research at trading house Trafigura, which is among the world’s largest metals traders. “Prices coming lower has also helped trigger some restocking demand.”
China’s stimulus in energy infrastructure and strength in the manufacturing sector have more than made up for the weak real estate market, he said.
Demand from the solar market is particularly strong: solar farms typically use aluminium for frames and mounting solar panels. Electric vehicles also require more aluminium than traditional internal combustion engine cars, another medium-term source of demand growth.
In July, China’s imports of aluminium rose 20 per cent compared with a year earlier.
However, this strong demand has so far had muted impact on global prices, as China’s domestic production of aluminium is also rising and close to record highs.
Those who are bullish on aluminium in the long term, including Swiss trading house Glencore, which is expanding its alumina refining and bauxite mining operations in a $1.1bn deal with Hydro earlier this year.
Outside China, demand from south-east Asia and the US has helped to support the market, but Europe’s appetite for aluminium has been much weaker.
Even though about half of Europe’s smelting capacity has closed due to high energy prices, the weakness in the European market has far outstripped the decline in production. European demand for extrusions, a finished type of aluminium used in cars and appliances, in the second quarter of this year were 23 per cent below the same period last year, according to Hydro.
At the same time, in Europe debate is heating up over the role that Russian aluminium plays in the market. European producers such as Hydro are calling for Russian material to be banned, but European governments have so far been reluctant to take that step.
Mid-sized manufacturers in Europe say free trade in aluminium needs to be maintained. In July a letter from five European business associations called on LME to resist calls to impose sanctions on Russian material, saying that doing so would hurt small and medium-sized downstream manufacturers.
Some traders say the current contango in LME aluminium is partly due to the build-up of Russian stocks in LME warehouses, because arbitrage traders are unwilling to get stuck holding Russian material. High financing costs are also contributing, as they make it more expensive to hold metal.
But even the gloomiest market participants expect that today’s weak demand won’t persist for ever.
“Over time we expect this to change,” says Kildemo of Hydro. “The outlook for aluminium looks much more interesting in a midterm perspective, than it has been for a long time.”