Following impressive rallies in the first and third quarters of 2021, financial risk management, solutions and insights company Fitch Solutions Country Risk and Industry Research (Fitch Solutions) is revising its aluminium price forecasts for this year and next upwards to $3 000/t and $2 800/t, respectively.

This compares with Fitch Solutions’ previously forecasted aluminium prices of $2 300/t for this year and $2 050/t in 2023.

Aluminium prices have been on a broad upward trajectory since the beginning of the Chinese economic recovery from the Covid-19 pandemic in the second quarter of 2021.

This was demonstrated by the London Metal Exchange’s (LME’s) aluminium futures reaching record highs, peaking at $3 200/t this month, mainly driven by supply-side factors such as higher input costs of energy, alumina and prebaked anodes.

As such, aluminium prices rose sharply in September and October 2021 to a peak of $3 221/t, prompted by a severe power crunch in China, which led to aluminium smelters in the country being ordered to limit or halt production in an effort to reduce pressure on the power grid.

This was compounded by high energy prices elsewhere, which squeezed smelters’ margins.

However, aluminium prices fell from mid-October 2021 after an intense government crackdown on coal hoarding and speculative trading in China.

The Lunar New Year holidays also impacted on Chinese aluminium output, while the prospect of sanctions on Russia amid growing geopolitical tensions in Ukraine had also helped to push up prices, Fitch Solutions reports.

Although Fitch Solutions expects aluminium prices to remain significantly elevated this year, it does not expect aluminium prices to remain at their current highs throughout this year as supply issues ease slightly.

A return to greater production in the Chinese hub in Baise as a result of Covid-19 restrictions being lifted will weigh on prices slightly, but Fitch Solutions expects many of the other factors to be more persistent in the second and third quarters.

HIGH PRICE MAINTENANCE

Fitch Solutions’ forecast of prices of $3 000/t this year and $2 800/t in 2023 incorporates its expectations that some supply disruptions will persist over the coming year and into 2023.

In particular, the firm notes its oil and gas team’s consideration that energy prices are likely to remain elevated and are subject to significant further upside risk from tensions around Ukraine and Iran.

Further, Fitch Solutions expects alumina prices to remain higher for longer, amid ongoing supply issues and greater demand expectations for this input.

The aluminium market will remain particularly sensitive to supply shocks as a result of historically low stocks of the metal.

While Russian and European smelters will be able to respond to higher prices this year and next, bringing more supply onto the market, Chinese production is relatively inelastic owing to the smelting capacity ceiling of 45-million tonnes a year of aluminium.

With 38.9-million tonnes a year of production in 2021, or 59% of the global total, Fitch Solutions highlights that China offers limited scope for expansion of production under current policy.

These supply constraints will anchor prices at a higher level and, although production will be strongly incentivised elsewhere, limits on Chinese supply will give strong support to prices in the short and long term.

In addition, the firm expects a rise in demand from China this year, as that government introduces some form of stimulus in the next few months in response to weakening economic growth prospects driven by real estate sector weakness and strict Covid-19-related lockdowns.

Going forward, Fitch Solutions expects aluminium prices to remain elevated also because aluminium will be supported by the accelerating shift to a green economy, in particular by sustained demand from the automotive sector as the metal is used in place of other metals to bring electric vehicle weights down.

In this regard, the firm expects to observe increased use of the metal in structural and body components of vehicles, such as fenders and doors. Within this context, aluminium foams will experience increased demand for use in construction and automotive manufacturing.

Beyond 2025, Fitch Solutions expects Chinese aluminium production to plateau, helping to narrow the global aluminium surplus by limiting upside growth.

As such, China is positioned to reach its peak smelting capacity of 45 000 t in the coming years, with installed capacity expected to reach 43 000 t at the end of this year.

Meanwhile, the firm suggests that, as sustainability remains top of mind this year and beyond, rising demand for low-carbon aluminium presents a future risk to aluminium pricing.

At present, demand is not sufficient enough for a significant or reliable “green premium” to materialise, but as carbon-neutrality target dates edge closer in the coming decades, the market could face complications trying to price the more sustainable metal, reports Fitch Solutions.