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Are Aluminum Prices About To Break Out?

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Ag Metal Miner

Ag Metal Miner

MetalMiner is the largest metals-related media site in the US according to third party ranking sites. With a preemptive global perspective on the issues, trends,…

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China’s Power Crisis Could Have A Massive Impact On Aluminum Supply

  • The power crisis in China is driving aluminum alloy prices higher as supplies come under threat.
  • China is limiting supplies of key components used across a range of industries.
  • While aluminum mills are unlikely to go short in the U.S., prices could certainly rise.

A timely post by the Financial Times covers the threat to the global auto industry as a result of the power crisis in China limiting supplies of key components used across a range of industries. But specific to the post is the making of aluminum alloys. Almost 90% of the world’s magnesium production comes from China, the Financial Times reports. The Chinese government ordered roughly 35 of its 50 magnesium smelters to close until the end of the year due to power shortages.

The report quotes Barclays analyst Amos Fletcher, who said: “Thirty-five percent of downstream demand for magnesium is auto sheet — so if magnesium supply stops, the entire auto industry will potentially be forced to stop.”

Rising aluminum alloy costs

The threat is real enough. Unfortunately, as we wrote recently on this issue, flagging up the risk to supply contracts and the potential for cost pass-throughs by aluminum mills, it is not confined to magnesium.

Since our last post, MetalMiner has seen first-hand examples of mills seeking to renegotiate extrusion contracts due to rapidly escalating raw material costs – specifically silicon, manganese, and magnesium. All of those rely on high power consumption smelting or refining processes. Furthermore, the world has become dangerously reliant on China for these materials.

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Power costs have always been a driver of aluminum prices. However, if one metric ton of aluminum takes 16-megawatt hours (MWh) of power, then by comparison one ton of magnesium takes 35-40 MWh, making power costs an even more critical cost driver for the metal.

Chinese export prices rise, inventory lags elsewhere

Price rises are due to both a rapid escalation in Chinese export prices and to the lack of backup inventory in Europe and elsewhere.

The U.S. has one major domestic producer. However, it relies in part on imports. While aluminum mills are unlikely to go short in the U.S., prices could certainly rise.

Europe is not so fortunate.

The Financial Times reported European Aluminium has asked the EU and national governments to work urgently towards immediate actions with their Chinese counterparties. It fears Beijing will now direct the remaining production to its vast domestic aluminum industry, as reserves in Europe are likely to run out by the end of November (if not before).

So far, examples of aluminium mills seeking to renegotiate prices or postponing deliveries are few and far between. However, price increases and supply shortage are a recent development. Most mills are, for the time being, issuing advisories, taking the first steps to warn clients of an impending problem, positioning themselves for what could be to come if they either cannot get supplies or the cost increases become so exorbitant that mainstream mills need to apply alloy surcharges, or possibly both.

By AG Metal Miner

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