As the geopolitical conflicts in the Middle East continue, the prices of crude oil and natural gas have soared, and the supply of raw materials has been disrupted. The important aluminum production enterprise in the Middle East, Bahrain Aluminum Company, announced the initiation of a controlled and safe shutdown procedure for three aluminum smelting production lines to cope with the dual pressures of blocked raw material imports and halted product exports. Qatar Aluminum also reduced some of its production capacity. The aluminum production capacity in the Middle East accounts for approximately 9% of the global capacity. Market concerns have arisen that the blockage of the Hormuz Strait shipping lane would lead to the shutdown of more production capacity. The price of LME aluminum once rose above 3,500 US dollars per ton. The core logic behind this round of aluminum price increase stems from the changes in market expectations for raw materials and energy supply, reflecting that these two factors play a significant role in the trend of aluminum prices.
The production process of electrolytic aluminum is clear. The core steps are "alumina ore - alumina - electrolytic aluminum". The production process requires a large amount of electricity, alumina, pre-baked anode, and other materials. The overall cost structure is relatively rigid, and the proportions of each component are relatively stable. The total production cost of electrolytic aluminum mainly consists of four major sections: First, the electricity cost accounts for 35% to 45%, ranking as the largest cost item, and is the core variable of the fluctuation in electrolytic aluminum costs. The average ton of aluminum power consumption in the industry is stable at 13,000 to 13,500 kilowatt-hours. Even if the technology continues to be optimized, the space for reducing power consumption is extremely limited, and it belongs to the basic performance consumption. A 0.1 yuan per kilowatt-hour fluctuation in electricity price directly leads to a 1,300 to 1,350 yuan change in the electricity cost per ton of aluminum. Second, the cost of alumina accounts for 35% to 40%, being the second largest cost item. Each ton of electrolytic aluminum requires 1.92 to 1.95 tons of alumina, and the cost fluctuation is mainly affected by the price of alumina ore, shipping costs, and the price of alumina itself. Third, the cost of pre-baked anode and auxiliary materials accounts for 8% to 12%. The pre-baked anode is the core consumable material of the electrolytic cell, and its cost is affected by the prices of upstream chemical products such as petroleum coke and asphalt, but the marginal impact on the overall cost is limited. Fourth, the fixed and additional costs account for 8% to 12%, including equipment depreciation, labor costs, environmental protection and operation maintenance, financial expenses, and logistics costs. Such costs are relatively fixed and have very little short-term fluctuation, and they are not the core driving factors of aluminum price changes.
From the cost structure, it is easy to see that the electrolytic aluminum industry is essentially an energy conversion industry that "transforms electricity into aluminum". The costs of electricity and alumina account for about 80% of the total. When there is a shortage of electricity in a certain area or disturbances occur in the supply of raw materials, the price of electrolytic aluminum will fluctuate. So, which factor has the greatest impact on the price of electrolytic aluminum?
In 2021, it was the first year for China to implement the "carbon neutrality" goal. The electrolytic aluminum industry, as a high-energy-consuming sector, faced increased regulatory pressure. At the same time, domestic efforts to reduce the capacity of outdated coal mines continued, and the elasticity of coal supply decreased. The supervision of coal mines intensified, and some coal mines even experienced production halts. Meanwhile, Australia's coal imports were restricted, and imports from Mongolia and Indonesia were insufficient. China's coal supply was affected, leading to a significant increase in the price of thermal coal, which dampened the enthusiasm of power plants for generating electricity. As a result, there was a shortage of electricity. In May 2021, Yunnan initiated the "emergency peak load reduction and power rationing" for the first time. Due to the impact of power rationing, the electrolytic aluminum plants in Yunnan reduced production by 10%. In July of the same year, as the power shortage expanded, Yunnan experienced "secondary power rationing", with the reduction in production at local electrolytic aluminum plants reaching 30%. In Guangxi, due to the shortage of electricity, electrolytic aluminum plants were required to reduce their load by 30%. In September, the country entered the most stringent stage of energy consumption control, with 12 provinces implementing production and power rationing. It was not until November that the power rationing situation gradually eased.
In 2021, China's electrolytic aluminum production was reduced by 3.8 million tons, setting a new record for the largest reduction. At the beginning of 2021, the price of aluminum on the Shanghai Futures Exchange fluctuated around 15,000 yuan per ton. As the scale of power rationing and production restrictions expanded, the price of aluminum on the exchange continued to rise. By mid-to-late October, the price of the main contract reached the highest level of the year at 24,765 yuan per ton, with an increase of nearly 70%. In November, as the power rationing situation gradually eased, the price of aluminum on the exchange dropped rapidly, with a decline of 36% within one month.
On December 18, 2023, a fuel warehouse explosion occurred in Conakry, the capital of Guinea, which had a significant impact on the production and transportation of bauxite. China has a high dependence on bauxite imports, and most of the imported bauxite comes from Guinea. This incident led to a 25% increase in the price of alumina in China within half a month, while the price of the main contract of aluminum futures in Shanghai only rose by 9%. In the third quarter of 2024, the supply of bauxite from Guinea again experienced disturbances. Coupled with the fact that Rio Tinto's alumina plant announced an inability to deliver due to an unpreventable explosion of the natural gas pipeline, the price of alumina rose again. In the fourth quarter of the same year, due to stricter environmental policies, it was almost impossible for domestic bauxite mines to resume production on a large scale. From the end of 2023 to December 5, 2024, the price of the main contract of alumina futures rose by as much as 96%, among which the price from September to December 2024 increased by more than 45%. However, during the same period, the price of aluminum futures in Shanghai did not show a significant increase. The core logic of the aluminum price in this round of the market was the expectation of a "soft landing" of the US economy, and the increase in the price of alumina only played a supporting role.
In conclusion, electricity has a greater and more direct impact on the price of electrolytic aluminum. China has long suffered from an oversupply of alumina, and domestic reserves of bauxite and alumina have remained at high levels for a long time. Short-term supply disruptions will not have a significant impact on electrolytic aluminum plants. However, the situation in the Middle East is different from that in China. The Middle East relies on imports of alumina at a rate close to 70%. The blockage of shipping in the Strait of Hormuz has led to a significant decrease in alumina supply, causing local aluminum plants to reduce production. Electricity is a rigid demand for electrolytic aluminum production. Once electrolytic aluminum plants encounter power restrictions, they cannot produce, so the impact of electricity on the price of electrolytic aluminum is more direct.
