Here’s Why Aluminium Prices Have Crossed Two-Year Highs

Improving economic growth following pandemic-led restrictions has led to the price of the metal—used to make aircraft bodies and parts, power lines, consumer electronics and beer cans—rising 12% so far this year alone, according to Bloomberg data. And orders for aluminium held in warehouses tracked by the London Metal Exchange hit the highest level since December 2019, Bloomberg reported.

Moreover, China, the world’s largest consumer of the metal, is facing a deficit of 0.9 million tonnes while the rest of the world has a surplus of 3.5 million tonnes, according to Hindalco Industries Ltd.

Demand was back at pre-Covid levels in the third quarter, which is expected to sustain through the fourth quarter, Satish Pai, managing director of Hindalco, said in a conference call for the quarter ended December.

Here’s a closer look at the factors driving up aluminium prices.

Electricity Curbs In Baotou

The Chinese city of Baotou in Inner Mongolia, a major aluminium producing region, ordered shutdowns to meet its energy consumption targets for the first quarter. That should translate to an output reduction of 100,000 tonnes of the metal, according to Wan Ling, a Beijing-based analyst commodity market researcher CRU.

National Carbon Trading Market

Aluminium could be included in the national carbon trading market, leading to higher costs for the metal and supply disruption on thermal power-based aluminium production, CLSA said in its report.

To curb its environmental impact, the Chinese government launched a nationwide carbon trading market to reduce greenhouse gas emissions in 2021.

Aluminium, according to a Mysteel report, is expected to be the biggest winner in China’s decarbonisation push as it would boost demand.

Outlook From Alcoa

Alcoa Corp.—the world’s largest producer or aluminium ores, including bauxite and alumina and aluminium products—expects consumption to rise 10% year-on-year in 2021 globally excluding China.

It’s for the first time in two decades that growth in aluminum markets outside China could climb in the double digits, Roy Harvey, the company’s president and chief executive, was quoted as saying in a Jan. 20 earnings call.

To be sure, while all factors point to underlying strong demand momentum building for the sector, LME stockpiles, according to Bloomberg report, surged by a record last week in a move that traders and analysts said was at odds with strong regional demand.

What Analysts Say

Aluminium prices have been firming up led by rising imports of the metal by China, said Rakesh Arora, managing partner of Go India Advisors. China's aluminium imports rose 150% year-on-year during January-February. Firming aluminium prices augur well for Indian aluminium firms—Nalco Ltd., Hindalco and Vedanta Ltd.

Hindalco, according to a Bloomberg consensus rating, is the aluminium player with highest return potential, at about 10%, followed by Nalco’s 1% and Vedanta at -9%