Tightening coal supplies, toughening emissions standards have forced some provinces in China to ration coal-fired power production. According to Reuters, output curbs have hit steel, aluminum and cement industries particularly hard. About 7% of aluminum production capacity has been suspended.
It is believed some 2.33 million tonnes per year of aluminium smelter capacity has been cut because of energy restrictions linked to Beijing’s decarbonization goals. Rather than a planned increase in annualized capacity this year of 1.8 million tonnes, it could be well into 2022 before that capacity is gradually brought to market. As such, that would prolong the tight market and elevated aluminum prices.
Outside of China, capacity has been slow to restart. Alcoa is sitting on some 20% of its total capacity idled. That is not by a lack of demand or poor prices but by constrained power supply, outside the Middle East, in particular. Even the firm’s restart of its 60% owned Brazilian Alumar smelter after six years idle is by no means certain to run to capacity. The country is still facing drought-restricted hydroelectricity production.
A gradual improvement in global shipping constraints and more balanced supply chain inventory levels will gradually ease demand next year. However, it is becoming increasingly clear that the aluminum supply market could remain tight through the middle of next year.
Aluminum prices have the potential to not just punch through the LME’s $3,000 per metric ton level. Not only that, they could stay there in the coming months. Consumers have looked aghast at rising aluminum prices this year and wondered how much longer it can continue.
The explanation that global economies are bouncing back from pandemic lockdowns has encouraged many to hope that once supply chains are restocked, demand will ease and aluminum prices will fall. Inventory supply chain restocking is also driving demand in North America and Europe. That process has been exacerbated by a nightmare global logistics market hampering deliveries and pushing up costs.