The raw materials sector has once again felt the attraction of the markets. There are certain elements that help the world transition to greener energy sources. There are certain resources that are necessary to feed the growing global population. There are also monetary resources that allow different economies to guarantee their populations a different standard of living.
Historically, commodities have been a cyclical asset class, typically going down when the business cycle turns negative. However, history shows that commodity prices can continue to rise long after a business cycle has turned if things are favourable, such as aluminum.
“The crude oil price shocks of the 1970s and 1980s are an example of this. And, while it is true that these are unusual cycles, it is likely that we are experiencing another price shock in the energy sector today, ”says Nitesh Shah, director of raw materials and macroeconomic analysis at WisdomTree, in a recent report.
In this sense, the demand for aluminum has skyrocketed this year, with prices reaching an all-time high in March, as the post-pandemic consumption boom brought strong demand for electric vehicles, appliances and equipment powered by renewable energy, which use the silver gray metal as components.
Jin Chang, general manager and global head of metals at CME, described it this way at the recent Open Markets forum: “Clients have asked us for a viable alternative to manage risk in the aluminum and metals sector in general. basics…Volatility is here to stay and we need proper risk management tools to trade, as well as transparency around pricing.”
At that same forum Andy Massey, Bonnell Aluminum’s vice president of metals, purchasing and transportation, added that demand for electric vehicles remains high, driving current and future demand for the light metal. “The aluminum market is booming. More and more aluminum is used in cars. Before we were excited about £300 per vehicle, but with some of the electric car models we are getting to £500 or £800, which is a huge leap,” he said.
Overall, though, aluminum growth is expected to remain healthy, with sales of the metal expected to reach $238 billion by 2028, up from $142 billion last year, according to a report by SkyQuest Technology. consultancy.
“In the long term, the outlook for aluminum metals is good. This is because it is a key material in the transition towards clean energy, while aluminum and copper are also very important components in electric vehicles”, highlights the consultancy.
The auto industry is the world’s largest consumer of aluminum, with nearly 67 million vehicles a year, according to SkyQuest. China is the largest producer, with 60% of production, followed by Russia, and then Europe and the United States. “The world manufactured 68.9 metric tons of aluminum in 2022 through October,” ING analyzes in a report.
looking into the stock
An important factor continues to emerge in the aluminum market: the low production of foundries. Although it is not the only issue affecting metal activity, the fact that functions will remain closed or with limited capacity is still a considerable problem.
“Although aluminum has a much lower melting point than other metals such as nickel or copper, power shortages will drive the aluminum market away because the functions don’t have enough power to run,” Morgan Stanley says in a report. This very issue caused the industry to suffer significantly under the weight of the 2022 European energy crisis.
“In the end, aluminum prices are just a symptom of a larger problem,” adds the US investment bank. “Even if buyers have the funds to replenish their inventories, the supply just isn’t there,” he adds.
Therefore, production levels have to increase so that inventory levels can do the same. Of course, no one is 100% sure when that will happen. In the near term, the market could see increased volatility and, if stock levels remain low, more bottlenecks in the supply chain that would negatively impact inflation. The next few months may be key.