Why aluminium prices are struggling at a one-and-a-half-year low

Commodity prices are in a turmoil and financial and currency markets are volatile since the start of the Russia-Ukraine conflict. Policy tightening measures of central banks, strong US currency, and fears of recession hindered global economic activities.

Since the Russian invasion of Ukraine, aluminium has lost its steam shedding prices to a one-and-a-half-year low. Prices on the benchmark London Metal Exchange has corrected to more than 48 per cent from its all-time high tested in March. Similar moves were witnessed in Shanghai and the MCX futures.

Aluminium prices have been extremely volatile for the last couple of years. During the period of Covid lockdown, prices plunged to multi-year lows due to a weak industrial demand. But prices rebounded with strength in 2021 as increased economic activities boosted the demand for industrial commodities.

In the first quarter of 2022, prices hit an all-time high of $4073.5 a tonne on the LME on the back of supply concerns followed by geopolitical uncertainties. However, prices currently shed more than 47 per cent from its all-time high due to negative fundamentals.

Aluminium is a silvery white lightweight metal used in construction, automobile, aerospace, packaging, electronics, and many other industries. The increased geopolitical risks associated with the war adversely weighed on industrial activities across the globe.

Developments in China, which accounted for half of the global aluminium production, also dominated the price action. The prolonged Covid lockdown and the country’s zero-Covid policy have further weakened the 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. Incessant power shortages in the country also disturbed the supply chain of the commodity this year.

Aluminium production is a highly energy-sensitive process. The Russian-Ukraine war took global fuel prices to record highs, disrupting smelting activities in key producers.

A shortage of Russian supplies also influenced the market. Russia is the second-largest primary aluminium producer, with an output capacity of almost 6 per cent of global production.

Prices spiked earlier when the West announced sanctions on the country. The trade ban made it difficult for several corporations and nations to do business with Russia.

Strengthening of the dollar in the wake of monetary tightening also had a negative influence on the demand for the metal. The dollar gained significantly after an aggressive rate hike by the US Federal Reserve. It is currently placed well above a two-decade high.

Aluminium is the second-largest commodity consumed among all other industrial metals. Almost 50 per cent of global production is used for transportation and construction purposes.

The recent new areas of demand in electric vehicles and the motor industry may further increase the demand for the metal in the near future. In the electric vehicle segment, aluminium is used for structural body frames and battery packs to improve battery efficiency.

On the price front, an immediate turnaround is least expected due to feeble demand from China and the rest of the world. China’s deleveraging initiatives may affect the demand in the metal-hungry real estate sector. The zero-Covid restrictions continuing into 2022 may also limit China’s appetite for commodities.

However, the trend may not continue much longer. Supply constraints are likely to anchor prices in the medium- to long- term. Production bottlenecks in Europe due to high energy prices and a government-implemented hard cap on smelting capacity in China may increase supply constraints and support prices later.

(The author is Head of Research at Geojit Financial Services)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)