Since the Russian invasion of Ukraine, aluminum has lost steam prices to a year-and-a-half low. Prices on the benchmark London Metal Exchange have corrected more than 48% from their record high tested in March. Similar movements were observed in Shanghai and
Aluminum prices have been extremely volatile over the past two years. During the Covid lockdown period, prices plunged to multi-year lows due to weak industrial demand. But prices have rebounded strongly in 2021 as increased economic activity has boosted demand for industrial goods.
In the first quarter of 2022, prices hit a record high of $4073.5 per tonne on the LME due to supply issues followed by geopolitical uncertainties. However, prices have currently lost over 47% of their all-time high due to negative fundamentals.
Aluminum is a silvery-white lightweight metal used in construction, automotive, aerospace, packaging, electronics, and many other industries. Heightened geopolitical risks associated with the war weighed on industrial activities around the world.
Developments in China, which accounted for half of global aluminum production, also dominated price developments. The prolonged Covid lockdown and the country’s zero Covid policy further weakened demand for the metal.
The Chinese government had imposed restrictions on heavy industries with a plan to reduce carbon emissions, which had an impact on prices. Ongoing power shortages in the country have also disrupted the commodity’s supply chain this year.
Aluminum production is a highly energy sensitive process. The Russian-Ukrainian war drove world fuel prices to record highs, disrupting the smelting operations of major producers.
A shortage of Russian supplies also influenced the market. Russia is the second largest producer of primary aluminium, with a production capacity of almost 6% of world production.
Prices spiked earlier when the West announced sanctions against the country. The trade ban has made it difficult for several companies and nations to do business with Russia.
The strengthening of the dollar in the wake of monetary tightening also had a negative influence on the demand for the metal. The dollar appreciated significantly after an aggressive rate hike by the US Federal Reserve. It is currently placed well above a two-decade high.
Aluminum is the second most consumed product among all other industrial metals. Nearly 50% of global production is used for transport and construction purposes.
Recent new demand areas in electric vehicles and the automotive industry may further increase the demand for the metal in the near future. In the electric vehicle segment, aluminum is used for body frames and batteries to improve battery efficiency.
On the price front, an immediate turnaround is least expected due to weak demand from China and the rest of the world. China’s deleveraging initiatives could affect demand in the metal-hungry real estate sector. The zero-Covid restrictions that will continue until 2022 could also limit China’s appetite for raw materials.
However, the trend may not continue for very long. Supply constraints are likely to anchor prices in the medium to long term. Production bottlenecks in Europe due to high energy prices and a strict government-imposed cap on smelting capacity in China could increase supply constraints and support prices more late.
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