• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 7 days Does Toyota Know Something That We Don’t?
  • 11 hours America should go after China but it should be done in a wise way.
  • 6 days World could get rid of Putin and Russia but nobody is bold enough
  • 8 days China is using Chinese Names of Cities on their Border with Russia.
  • 9 days Russian Officials Voice Concerns About Chinese-Funded Rail Line
  • 10 days OPINION: Putin’s Genocidal Myth A scholarly treatise on the thousands of years of Ukrainian history. RCW
  • 10 days CHINA Economy IMPLODING - Fastest Price Fall in 14 Years & Stock Market Crashes to 5 Year Low
  • 8 days CHINA Economy Disaster - Employee Shortages, Retirement Age, Birth Rate & Ageing Population
  • 2 hours How Far Have We Really Gotten With Alternative Energy
  • 9 days Putin and Xi Bet on the Global South
  • 9 days "(Another) Putin Critic 'Falls' Out Of Window, Dies"
  • 10 days United States LNG Exports Reach Third Place
  • 10 days Biden's $2 trillion Plan for Insfrastructure and Jobs
Three Countries Hold 50% of the World’s Uranium Reserves

Three Countries Hold 50% of the World’s Uranium Reserves

Australia, Kazakhstan, and Canada are…

Trump Vows to Block U.S. Steel Acquisition

Trump Vows to Block U.S. Steel Acquisition

Steel prices decline as Nippon's…

Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

More Info

Premium Content

Soaring Energy Prices Fuel Mayhem For The Metals Industry

  • Rising energy prices fuel mayhem in the industrial metals sector.
  • Aluminium smelters have curtailed production as a result of quickly rising energy costs.
  • And traders now fear that the wave of closures will not only continue driving aluminum prices up but also make it increasingly difficult to secure supply in the market.

Long-suffering Americans grappling with historic levels of inflation are finally enjoying some reprieve. After a relentless climb, prices at the pump have been heading south, with national average gas prices tumbling to a seven-week low of $3.36 a gallon, according to AAA. Fuel prices started leveling out after President Joe Biden announced on November 23 the biggest-ever release from the Strategic Petroleum Reserve, though experts have labeled it as a mere band-aid.

The energy sticker shock has not only been one of the biggest drivers behind record inflation levels but is fueling mayhem in the metals sector.

High energy prices are beginning to take a heavy toll on power-hungry industries such as aluminum smelting, forcing a wave of closures.

According to the Wall Street Journal, high energy costs have triggered a wave of closures for aluminum plants in China and Europe that have failed to cut costs to remain profitable. Aluminum smelters in Europe are particularly feeling the heat after natural gas prices surged five-fold due to cold weather and a drop in gas flows from Russia. Energy costs can account for nearly half the cost of making aluminum.

Early this year, aluminum multinational company Alcoa Corp. (NYSE: AA) reached an agreement with its workers for a two-year curtailment of the San Ciprián smelter with an annual capacity of 228,000 metric tons.

"This has been a challenging road for everyone involved, and we look forward to the future, working constructively with our employees and stakeholders to implement the agreement we reached," Alcoa President and CEO Roy Harvey said.

In the same vein, Norwegian aluminum manufacturer Norsk Hydro AsA (OTCPK: NHDY) has also said it would cut production at a plant in Slovakia to 60% of its capacity in response to electricity prices, which show no signs of subsiding.

Other companies with smelters in Montenegro, Romania, and France, among other places, also plan to lower production. Producers of the metal in China have cut back heavily on production amid a power shortage in the country.

Overall, Macquarie commodity strategist Lin Zhao estimates that smelters have taken down about 4 million tonnes of aluminum production capacity globally mainly because of high electricity and energy prices, with more closures expected to come in the next few months if energy prices do not come down.

And traders now fear that the wave of closures will not only continue driving aluminum prices up but also make it increasingly difficult to secure supply in the market.

Low inventories, surging prices

According to FactSet, aluminum reserves in LME-approved warehouses have already dropped to less than 850,000 tonnes, the lowest level since 2007. Inventories levels as recently as March 2021 were more than twice as high. Meanwhile, canceled warrants have risen further to constitute a sizable 48% of inventories. SHFE aluminum inventories fell for a fifth straight week in the previous week, and at 282.7kt are now the lowest since October 2021.

But the aluminum bulls are hardly complaining.

In its latest commodity updates, Standard Chartered says it remains positive on aluminum price prospects and expects prices to still test higher, marking further forays above USD 3,000/t, with supply curtailments continuing to crimp output in China and Europe. 

StanChart says that whereas power rationing and shortages have eased with better coal supply, other dynamics impacting aluminum output such as China's "dual control" policy, decarbonization aims, and the timing of the Beijing Winter Olympics remain hurdles to near-term supply expansion. The analysts also expect a combination of the above factors to lead to delays in bringing newly commissioned capacity online.


StanChart notes that while the challenges to China's output have been the focus of the market since late Q1-2021, the focus is now shifting to European smelters. Rallying power and electricity prices in Europe have created a hostile environment for aluminum smelters, raising costs significantly and leading to output curtailments or smelter shutdowns in France, Germany, Spain, the Netherlands, Montenegro, Romania, and Slovakia. These smelters sit at the high-end of the cost curve, with energy costs comprising a sizable chunk of production costs, and are therefore extremely sensitive to moves in power prices. Regional aluminum physical premiums remain elevated but below 2021 highs in the US and Japan. However, physical premiums in Europe began moving higher in early January, and at USD 410/t have now risen to the highest since February 2015 in response to smelter cutbacks in the region.

After a wild rally in 2021, prices of most base metals have remained stubbornly high this year, with many experts predicting that prices will remain elevated.

"We are bullish on mining for 2022 based on fundamental factors and valuations," Jefferies has said in a note entitled: "Same old song and dance for 2022"."We are most constructive on the base metals, and especially copper and aluminum, while we are most cautious on iron ore and coal."

Jefferies has forecast a massive shift in Chinese demand, with the old drivers of Chinese economic growth set to go into decline, while demand from the new economy sector rises. "We expect changes in the Chinese economy to lead to a shift from steel, iron ore and coal to copper, nickel, aluminum, and other 'energy transition' metals."

By Alex Kimani for Oilprice.com

More Top Reads From Oilprice.com:

Download The Free Oilprice App Today

Back to homepage

Leave a comment

Leave a comment

EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News