"Aluminum is in the emissions era"

Aluminum prices are climbing toward a 13-year high, aluminum scrap is in short supply, and supply chain disruptions remain a massive problem. ALUMINIUM spoke with Ross Strachan, senior analyst at CRU Group, about the dramatic changes in the industry.

ALUMINIUM: Mr. Strachan, can we assume that the pressure to become more sustainable will change the aluminium industry in a lasting way?

Ross Strachan: Absolutely! It is already impacting the industry in a number of ways and there are more changes that are set to happen. The most important is the pressure to lower carbon emissions. Aluminium is a highly energy intensive industry and as such the efforts in many countries to lower emissions from aluminium smelting will require either a change in power source to renewables or nuclear, as well as a complete change in smelting technology. It is in this light that various companies are investing substantial funds in a potential breakthrough technology of inert anodes and investing in renewable energy generation. Meanwhile, the capping of Chinese primary aluminum capacity and recent production cuts in various Chinese provinces this year is crucial to alleviate environmental concerns.

The price development of primary aluminium in recent months is well known – can you give a forecast for prices and capacities in the near future?

Strachan: We believe we are in a new era for aluminium – what we have called the emissions era. This is a crucial aspect underpinning price moves this year and for our forecast for both prices and capacity.  At the time of writing, we are forecasting LME aluminium price to average over $2,600/t in 2022 which would be a 13-year high and the risks to that forecast are skewed to the upside. Despite these high prices we expect capacity growth to be limited to just 2.4% next year, with growth in China being constrained by a capacity cap and a relatively small number of projects in the rest of the world.

And how do you think the issue of sustainability will affect the international market and trade flows?

Strachan: A major change for the industry stemming from environmental pressures is that China has become a net importer of primary aluminium. This change from the prior norm is a reason to believe that the SHFE price will need to stay above the LME (even after adjusting for the VAT difference) in order to attract imports to the country. This is also very supportive for LME prices as a result. Meanwhile, there is also growing pressure for greater recycled content and/or low carbon metal from consumers. In the longer run, the introduction of the Carbon Border Adjustment Mechanism by the European Commission may well also see low carbon metal drawn to Europe and high carbon aluminium redirected to other markets with no carbon pricing.

How about the current supply chain disruptions and high transportation costs? To what extent is the aluminium industry affected by that?

Strachan: This is a substantial headache for the industry. The aluminium industry is highly globalized and integrated and the massive dislocation is impacting the whole sector.

What are the the consequences?

Strachan: A crucial consequence is that premiums for ingot and particularly for some semi-fabricated and value-added products are at record highs in Europe and the United States of America. This is due to both the phenomenally high freight costs, which are now a multiple of levels a year ago, but also the dislocation is leading to many markets deeming it infeasible to get supplies from Asia due to the uncertainty.

The supply chain disruptions are also impacting the key automotive market as the shortage of semiconductors has severely hampered production in all China, Europe and the US. Fortunately, the impact has been a little less severe for the aluminium sector than for auto production as auto companies have, where possible, prioritized the rollout of electric vehicles and the production of premium vehicles over other ICEs. Our modelling shows the aluminium usage of both premium vehicles and EVs is typically much higher than in other ICEs.

At the ALUMINIUM Business Summit you will talk about recycled aluminium gaining importance. In your opinion, are the capacities to process scrap sufficient?

Strachan: There is some spare capacity at present but there will be a need for substantial further investment, particularly in China. Given the environmental pressures in China, it is becoming increasingly apparent that the Chinese market would need a marked increase in recycled aluminum usage in order to meet total metal requirements there. At present though, capacity is one thing, but availability of scrap is even more critical and has been the main constraint in the past year.

What could be the solution here?

Strachan: Given the growing desire for this material it will become increasingly vital for more measures to be taken by governments to encourage or enable collection of scrap and for companies to invest in new technologies that can recycle a wider range of material. One other important factor is that the design of products should be developed so that they can be easily recycled.

Sustainability in the industry seems to be primarily a European issue. Is this impression correct?

Strachan: Clearly, in many aspects, Europe is at the forefront of many of the necessary changes, perhaps unsurprisingly given various economic, political, and cultural reasons. There is certainly a more widespread consumer desire for urgent changes than in Asia or the US. However, there are also a variety of measures being taken across the globe to aid the necessary changes in the industry.

As described earlier, China has introduced a cap on primary capacity there and is restricting production even more and is encouraging recycled investment and a move to hydro powered smelters. Meanwhile, in North America and Russia there is substantial investment to develop inert anode technology that would be necessary for a zero-carbon solution for the industry. And in Brazil, Argentina, UAE and Australia they are already investing in renewables for some of their energy requirements to lower their carbon footprint.

And how do you prevent European industry from falling behind countries that don’t focus so much on this issue?

Strachan: One attempt to try and ensure the European industry doesn’t fall behind is the carbon border adjustment mechanism. This, over time, should theoretically look to make importers pay the same for their direct carbon emissions content as domestic producers. However, this will take some considerable time and even longer for other countries to enforce the same measure. Crucially, even then it will not cover indirect emissions which are often far larger than direct emissions.

The interview was conducted by Bernhard Fragner.

Experience Ross Strachan at the

ALUMINIUM Business Summit 2021
September 28th­–29th, 2021
Altes Stahlwerk Düsseldorf

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