Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
Bulls are on the rampage in the aluminum market.
The Shanghai Futures Exchange (ShFE) contract has led the way, rocketing to a 13-year high on Monday.
The London Metal Exchange (LME) three-month price has followed, hitting its own 10-year high of $2,726.50 per tonne on Tuesday.
The price surge is “irrational”, according to The China Nonferrous Metals Industry Association (CNIA), which hosted a video conference of the country’s top producers.
China’s problem today could be the rest of the world’s problem tomorrow
Such coded warnings are part of Beijing’s campaign to tame wild commodity prices, as was Wednesday’s third sale of state reserve metal, including another 70,000 tonnes of aluminum.
There is undoubtedly speculative excess in the Shanghai aluminum market. Open interest is at record highs and volumes are elevated.
But the driver of the rally is rooted in China’s own supply-chain tensions. Output curbs following energy restrictions are proliferating as provincial provinces scramble to meet mandated energy efficiency targets.
Welcome to aluminum’s decarbonisation paradox.
The world needs more aluminum to go green but the smelters that produce the stuff use huge amounts of power and account for around 2% of all man-made emissions each year.
Squaring that carbon circle is not going to be easy for China or the global market.
The 10 aluminum producers participating in the CNIA meeting committed to “continue to ensure supply and stabilise market expectations”.
Only, however, if their power-hungry smelters have sufficient supplies of electricity. Aluminum is produced by electrolysis not by blasting it in a furnace. No power, no aluminum.
And power in China is becoming a problem.
[Click here for interactive aluminum price chart]
Aluminum curtailments earlier this year in Inner Mongolia were modest but a sign of things to come as the coal-dependent province tried to meet new quarterly dual-control targets for energy usage and efficiency.
The province of Guangxi, another laggard in the energy league, last month ordered smelters to reduce run-rates to preserve power over peak demand periods.
A prefecture in Xinjiang, a massive aluminum smelter hub accounting for almost one-fifth of China’s capacity, has just mandated 10% production cuts across five smelters for the rest of the year.
The power situation hasn’t been helped by a long drought in hydro-electric Yunnan province, a newly emerging “green” aluminum production hub.
Since China is by far the world’s largest producer of aluminum, both at a raw metal and semi-manufactured product level, this collective powering-down places a big question-mark over global supply.
A market that has lived with Chinese over-supply for two decades is starting to price in a very different future.
Look at China’s headline aluminum production figures and the price reaction might seem excessive.
National output rose by 7.2% in the first seven months of the year, according to the International Aluminium Institute (IAI).
However, the year-on-year growth rate is flattered by a low covid-19 base. Annualised run-rates have increased by just 500,000 tonnes so far in 2021, a very muted response to high prices by historical standards.
It is clear that new capacity growth is being offset by the spreading energy restrictions. Constrained output has left a shortage of primary metal in parts of the country.
Shanghai exchange inventory has fallen from over 392,000 tonnes in April to a current 248,926 tonnes.
The world’s largest producer continues to suck in aluminum from the rest of the world. China imported 1.06 million tonnes of primary metal last year and another 744,000 tonnes in the first half of 2021 with no sign of any let-up in the preliminary July figures.
The country remains a large exporter of aluminum in the form of semi-manufactured products, which is starting to look increasingly anomalous as its hunger for commodity-grade metal grows.
One obvious policy tool would be to reduce the tax refund on product exports and divert volumes into the domestic market, a tactic already used in the steel sector.
That would be welcome news for aluminum product-makers everywhere else but wouldn’t alter the underlying price dynamic of China running out of production growth road.
China’s top state planner, the National Development and Reform Commission, has come out and urged aluminum producers to diversify into renewable power sources other than hydro such as solar and wind.
Two forms of power that ironically require significant amounts of aluminum. Indeed, the metal accounts for 85% of the mineral input of a photovoltaic cell in the form of pannelling, according to the World Bank.
It’s also used in many lithium-ion batteries and is a crucial material for light-weighting vehicles for energy efficiency. In terms of usage, it’s very much a green metal.
But smelting the stuff is carbon-intensive, particularly in China and the rest of Asia, where the power source is still overwhelmingly coal.
That inherent paradox – hard-wired into the metal because of the production process – is impacting the market landscape.
Stresses in China’s power system have turned the world’s largest supplier of aluminum into a regular net importer of primary metal.
China’s problem today could be the rest of the world’s problem tomorrow.
The IAI has estimated the world will need another 25 million tonnes of primary metal production to meet an expected 80% rise in demand by 2050, fuelled by the demands of decarbonisation.
That assumes a 100% recycling rate, which may be a very big ask of an industry that encompasses a wide spectrum of alloys.
Building that capacity while simultaneously “greening” existing capacity in a world that needs ever more renewable power is the conundrum facing the global aluminum industry.
The Chinese authorities may succeed in shooing away the aluminum speculators for now but they’ll be back unless someone can resolve aluminum’s puzzling carbon paradox.
(Editing by Barbara Lewis)
Comments