It cannot be long until Elizabeth Warren starts complaining about the wickedness of (checks notes) Big Aluminum, but just so you are prepared, here’s this from the Financial Times:
Tight supply, strong demand and escalating tensions in Ukraine have pushed the price of aluminium to its highest level since the global financial crisis, further fuelling inflationary pressures.
The lightweight metal, used in everything from electric vehicles to beer cans, rose as much as 3.3 per cent to a 13-year high of $3,236 a tonne on Tuesday before easing back to $3,187.
Aluminum and other important raw materials, including crude oil, natural gas and nickel, have charged out of the blocks this year. Supply has struggled to keep pace with demand as the world emerges from the coronavirus pandemic.
Aluminium has risen 13 per cent since the start of the year on the London Metal Exchange and is closing in on its record high of $3,380 a tonne set in 2008. Those gains have also boosted shares in Rio Tinto, which hit a six-month high on Tuesday. The Anglo-Australian miner is one of the world’s biggest producers of the metal.
Temporary (?) effect on inflation apart, why is it worth paying attention to the aluminum price?
This (from the FT) suggests why (my emphasis added):
The energy crisis in Europe and power rationing in China, combined with strong demand underpinned by rising sales of EVs, has put the 66m tonne a year aluminium market on a path to “inventory depletion” by 2023 according to Goldman Sachs….
Supply has been at the forefront of traders’ minds again this week. On Monday, Slovak aluminium smelter Slovalco, which is majority owned by Norsk Hydro, announced it would cut production to about 60 per cent due to high energy and carbon prices.
Aluminium is often referred to as solid electricity because of the large amounts of power required to transform its key ingredient, alumina, into refined metal. Smelter capacity losses in Europe now stand at more than 800,000 tonnes, while in China just under 3mn tonnes of output was suspended last year due to power constraints and tough energy control regulations.
The Ukrainian angle?
When Rusal, the biggest aluminium producer outside China, was hit by US sanctions in 2018 and blacklisted by financial institutions, it threw metals markets in to chaos and caused significant supply chain disruptions.
This was particularly true in Europe where the halting of shipments to Rusal’s Aughinish alumina refinery left smelters producing metal for carmakers such as BMW as well as Airbus, the manufacturer of the A380 superjumbo jet, scrambling for supplies.
“Given the significant costs this generated for developed market downstream industries and subsequent lobbying for a reversal in policy, it would appear improbable that a similar approach would be followed by western governments in the current episode,” said Snowdon [an analyst for Goldman Sachs].
That’s just another reminder that sanctions are going to be less of a weapon against Russia (in the event of a Ukrainian ‘incursion’) than is often (wrongly) assumed.
But the more significant underlying message is that if the cost of energy is increased on a more permanent basis as a result of climate policies (spoiler: it will be), aluminum will become more expensive, adding to cost pressures throughout the economy, and thus to greenflation.
And this is already not a hypothetical. The current rise in energy costs in Europe (and elsewhere) is at best only partly the product of climate policies (and the extent to which that is the case will vary geographically), but even so:
The Wall Street Journal (from late January):
[R]ising energy costs… have led to the closure of plants in China and Europe that haven’t been able to cut costs deep enough to remain profitable.
In Europe, natural-gas prices are almost five times as high as they were a year ago because of cold weather and a drop in the flow of gas from Russia. Energy can account for up to half of the cost of making aluminum, which is why traders nicknamed the commodity congealed electricity.
Traders fear smelter closures will make it tougher to secure supplies in a market that is used to having plenty of metal to go around…
The relentless surge in European energy prices is exposing the region’s biggest gas and power consumers to heavy losses, forcing industrial giants to cut production and threatening the economic recovery.
With energy costs spiking to fresh records day after day, financial strain is mounting for industries including metals and fertilizers. Aluminium Dunkerque Industries France, Europe’s top smelter of the metal, curbed output in the past two weeks…
Or Reuters from early January:
Soaring electricity prices in Europe have triggered cuts in energy-intensive production of aluminium.
Out of Europe’s total aluminium capacity of 4.5 million tonnes, Bank of America reckons about 650,000 tonnes have been cut so far while CRU estimates 729,000 tonnes.
Below is a list of the smelters that have lowered production…
Well, you get the picture.