With the advent of the Covid-19 global pandemic, three key factors were driving the major supply constraints of aluminium – port shutdowns, container ship shortages, and factory closedowns.
Factory shutdowns throughout the world, particularly in China caused bottlenecks and delays in production. When an upstream manufacturer experiences delayed production cascades downstream to several other manufacturers who are dependent on him. Similarly, many ports have been faced with restricted labour or shutdowns to avoid outbreaks. This was followed by crippling container and vessel shortages and a dramatic surge in ocean freight.
According to the World Bank, it was expected that the aluminium price would reach​​ $2,050/t by 2022 and $2,400/t by 2035. Whereas, International Monetary Fund estimated that the aluminium price would reach $2,126/t by 2022 and $2,276/t by 2026, while Innovation and Science Australia (ISA) projected the aluminium price to reach $2,160/t by 2022.
But in the real scenario, the aluminium benchmark price on the London Metal Exchange exceeded all the original expectations and marched to a 13-year high at US$3,984.50/tonne in early March, recording uninterrupted growth throughout January and February. The fast recovery in demand in comparison with production initially buoyed the aluminium prices; later on, the Ukraine-Russia conflict causing supply disruptions contributed to the price surge. However, in late March, the aluminium prices started trending down as Russia pulled back army activities in some parts of Ukraine allowing refineries and smelters to resume operations. As of April 13, 2022, the LME aluminium benchmark price rested at US$3,207/tonne, still much higher than the expected prices.
How is China causing aluminium price surges?
Baise, located near the Vietnam border, is popularly known as the "aluminium capital of southern China". Baise being the hub for aluminium production and mining produces around 2.2 million tonnes of metal every year.
China is the biggest producer of aluminium in the world. However, China follows a zero Covid strategy which led to targeted lockdowns, mass testing, and travel restrictions whenever there is a surge in Covid-19 cases. Baise was under lockdown again in 2022 owing to the new cases of Covid-19 which caused frequent disruptions in primary production and shipping hubs. This greatly affected the movement of raw materials, aluminium ingots, and workers.
The global price surge in aluminium was greatly influenced by the Baise lockdown though other factors were responsible too.
Impact on the Domestic Aluminium Market
Indian aluminium manufacturers like Nalco, Vedanta, and Hindalco are most likely to reap benefits as the aluminium price surged to a record high of above $3,500/tonne on the London Metal Exchange owing to the Ukraine-Russia war. India has the second-largest production capacity of aluminium at about 3.9 million tonnes/annum followed by Russia at about 3.7 million tonnes per annum.
With the lockdowns in China, the international aluminium market was faced with about a one million tonnes shortage of supply. The price of metal further increased over 8% in February to about $3,230/tonne. The absence of Russia from the market on account of sanctions on aluminium exports may help the Indian companies to take up the vacant space.
Summing Up
The global aluminium supply chain will remain disrupted as further lockdowns occur. Moreover, the Russia-Ukraine war will also keep impacting the prices greatly. Domestic primary manufacturers of aluminium are expected to experience a positive impact shortly as their low-cost position will enable them to tap export markets easily. The production cut of aluminium in China and reduced Russian aluminium exports will allow the domestic firms to take advantage of the rising aluminium prices and demand-supply position in the world.
