Rising electricity prices are stifling aluminium production in Europe and the US but if you are expecting that this will lead to a global shortage of primary aluminium, you would be wrong.
Industry news in the last few days has been full of stories of temporary US smelter closures directly linked to soaring electricity prices. US primary aluminium producer Century Aluminum (NASDAQ: CENX) plans to idle its biggest US smelter in Kentucky for up to a year while Alcoa (technically the largest US producer but producing more outside the US than at home) is not making headway with plans to reopen the idled Intalco smelter.
Aluminium requires the most electricity to make
Of all the base metals, aluminium requires the most electricity to make, the cost of the energy makes up between 30% and 44% of the total cost of the final aluminium ingot. With electricity prices skyrocketing in Europe and the US, producers have been struggling to keep operations profitable.The hunkering down of US smelters already happened in Europe six months earlier. Alcoa put production at its plant in Spain on ice in December last year saying it might restart production in 2024 after it negotiates new electricity agreements. During the same period, Norwegian producer Hydro cut the output at its plant in Slovakia by nearly a half.
Power prices in Europe have risen by several hundred per cent over the last year with the most severe increases in Germany, France and Netherlands. Output in Eastern European countries like Romania, Montenegro and Slovakia has declined to a lesser extent while Norway and Iceland, which use hydro and geothermal sources to generate power, have upped their production because of access to cheaper electricity.
But in total, European output declined by around 900,000 metric tonnes per year.
Can Chinese aluminium ride to the rescue?
All of this would translate into a tighter aluminium market and much higher prices were it not for the increase in Chinese production and exports. In the first five months of this year alone China increased its production by 3.66 million tonnes compared with last year.
The country underwent its own power crunch last year which had to do with China’s internal targets for cutting energy consumption combined with hydropower production problems caused by droughts. But as aluminium prices surged courtesy of the war in Ukraine, China ramped up its production to nearly historically high levels.
In a normal year this increased production would have been absorbed by a matching rise in demand caused by population growth and the slow increase in the global GDP but with inflation pressures in Europe and the US, and the economic slowdown in China, this is unlikely to be the case this year.
London Metal Exchange futures prices are already reflecting part of this picture: three-month futures are trading at $2,493/t, down from the highs of $3,000/t hit after Russia’s invasion in Ukraine, but still far above the levels around $2,000/t seen in the last decade.
While aluminium is unlikely to become cheap any time soon, for the moment the highs of March and April are likely to stay in the rear-view mirror.
WisdomTree Aluminium ETFs
| Product Name | ISIN | Exchange Ticker | Listing Currency |
| WisdomTree Aluminium Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi |
GB00B15KXN58 | ALUM | USD |
| WisdomTree Aluminium 2x Daily Leveraged Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi |
JE00B2NFTC05 | LALU | USD |
