Aluminum is a metal with high energy consumption and high carbon emissions. Under the background of the current global consensus on carbon reduction, and under the constraints of the domestic “double carbon” and “energy consumption double control” policies, the electrolytic aluminum industry will face A far-reaching change. We will continue to dig deep into the electrolytic aluminum industry, from policy to industry, from macro to micro, from supply to demand, to explore the variables that may exist in each link, and to evaluate their possible impact on future aluminum pricing.
High temperature dissipates, whether aluminum price faces “reduce fever”
The sweltering heat in August swept the world, and many parts of Eurasia encountered extreme high temperature weather, and the local power supply was under great pressure. Among them, the price of electricity has soared in many parts of Europe, which has led to another production reduction in the local electrolytic aluminum industry. At the same time, the southwestern region of the country was also seriously affected by the high temperature, and a large-scale production reduction occurred in the Sichuan region. Under the interference of the supply side, the aluminum price rebounded from around 17,000 yuan/ton in mid-July to above 19,000 yuan/ton in late August. At present, the hot weather has begun to subside and the Fed is expected to raise interest rates sharply. Is the aluminum price facing a “fever”?
We believe that the short-term macro sentiment is bearish, and the rise of the US dollar index has suppressed commodities, which has put pressure on aluminum prices. But in the medium term, the energy shortage problem in Europe will exist for a long time, the scale of reduction of electrolytic aluminum production will be further expanded, and its downstream and final consumption will be more dependent on imports. With the lower energy prices in China, the export of aluminum has a low-cost advantage, which makes the domestic export in the third and fourth quarters likely to maintain a good trend. In the off-season of domestic traditional consumption, terminal consumption shows obvious resilience, and the accumulation of storage in the midstream and downstream links is limited. After the high temperature recedes, the downstream construction is expected to resume quickly, driving inventory depletion. The continuous improvement of fundamentals makes Shanghai Aluminum more resilient. If the macro sentiment improves, it will have strong rebound momentum. After the “Golden Nine Silver Ten” consumption peak season, the weakening of demand and the prominent supply pressure, the aluminum price will again face greater pressure of correction.
Cost support is obvious, the pullback pressure is weaker than in June
In June, the Federal Reserve announced to raise interest rates by 75 basis points. After the announcement, the market began to trade recession expectations, triggering the largest decline in aluminum prices in a continuous cycle this year. The price fell from around 21,000 yuan/ton in mid-June to 17,000 yuan in mid-July. /t nearby. Fears of a future demand slump, combined with worries about weakening domestic fundamentals, contributed to the last drop.
After last week’s hawkish remarks by the Federal Reserve Chairman, the market once again traded expectations of a 75 basis point interest rate hike, and aluminum prices fell by nearly 1,000 yuan in three days, again facing huge pressure for a correction. We believe that the pressure of this correction will be significantly weaker than that of June: on the one hand, the profit of the electrolytic aluminum industry in June was above 3,000 yuan / ton, whether from the perspective of the hedging demand of the aluminum plant itself, or the upstream industry in the context of weakening demand. From the perspective of unsustainable high profits, aluminum companies are facing the risk of profit decline. The higher the profit, the greater the fall, and the current industry profit has fallen to around 400 yuan/ton, so there is less room for continued callback. On the other hand, the current cost of electrolytic aluminum is obviously supported. The average cost of electrolytic aluminum in mid-June was around 18,100 yuan/ton, and the cost was still around 17,900 yuan/ton at the end of August, with a very small change. And in a longer period of time, there is relatively limited space for alumina, pre-baked anodes and electricity costs to fall, which keeps the production cost of electrolytic aluminum at a high position for a long time, forming support for the current aluminum price.
Overseas energy prices are high, and production cuts will expand further
Overseas energy costs remain high, and production cuts will continue to expand. Through the analysis of the power structure in Europe and the United States, it can be seen that renewable energy, natural gas, coal, nuclear energy and other energy sources account for a large proportion. Unlike the United States, Europe relies more on imports for its natural gas and coal supplies. In 2021, European natural gas consumption will be about 480 billion cubic meters, and nearly 40% of natural gas consumption is imported from Russia. In 2022, the conflict between Russia and Ukraine led to the interruption of natural gas supply in Russia, which led to a continuous surge in natural gas prices in Europe, and Europe had to look for alternatives to Russian energy around the world, which indirectly pushed up global natural gas prices. Affected by higher energy prices, two North American aluminum plants have reduced production, with a scale of 304,000 tons of production reductions. The possibility of further production reductions will not be ruled out in the later stage.
In addition, this year’s high temperature and drought have also caused a major blow to Europe’s energy structure. The water level of many European rivers has dropped significantly, which has seriously affected the efficiency of hydropower generation. In addition, the lack of water also affects the cooling efficiency of nuclear power plants, and the warm air also reduces wind power generation, making it difficult for nuclear power plants and wind turbines to operate. This has further widened the power supply gap in Europe, which has directly led to the shutdown of many energy-intensive industries. Considering the fragility of the current European energy structure, we believe that the scale of European electrolytic aluminum production reduction will be further expanded this year.
Looking back at the changes in production capacity in Europe, since the financial crisis in 2008, the cumulative production reduction in Europe excluding Russia has exceeded 1.5 million tons (excluding the production reduction in the 2021 energy crisis). There are many factors for the reduction of production, but in the final analysis it is a cost issue: for example, after the outbreak of the financial crisis in 2008, the price of electrolytic aluminum in Europe fell below the cost line, which triggered a large-scale production reduction in European electrolytic aluminum plants; Electricity price anti-subsidy investigations occurred in the United Kingdom and other regions, which led to an increase in electricity prices and a reduction in production of local aluminum plants. The UK government also plans to start in 2013, requiring power generators to pay extra for carbon emissions. These measures have increased the cost of electricity consumption in Europe, resulting in most of the electrolytic aluminum profile suppliers that stopped production in the early stage and never resumed production.
Since the energy crisis broke out in Europe last year, local electricity costs have remained high. Under the influence of the Ukraine-Russia conflict and extreme weather, the price of natural gas and electricity in Europe has reached a record high. If the local average electricity cost is calculated at 650 euros per MWh, each kilowatt-hour of electricity is equivalent to RMB 4.5/kW·h. The energy consumption per ton of electrolytic aluminum production in Europe is about 15,500 kWh. According to this calculation, the production cost per ton of aluminum is close to 70,000 yuan per ton. Aluminum plants without long-term electricity prices cannot afford it at all, and the threat of electrolytic aluminum production reduction continues to expand. Since 2021, the electrolytic aluminum production capacity in Europe has been reduced by 1.326 million tons. We estimate that after entering the autumn, the energy shortage problem in Europe cannot be effectively solved, and there is a risk of further reduction in electrolytic aluminum production. tons or so. Considering the extremely poor elasticity of supply in Europe, it will be difficult to recover for a long time after the production cut.
Energy attributes are prominent, and exports have cost advantages
The market generally believes that non-ferrous metals have strong financial attributes in addition to commodity attributes. We believe that aluminum is different from other metals and has strong energy properties, which is often overlooked by the market. It takes 13,500 kW h to produce one ton of electrolytic aluminum, which consumes the highest electricity per ton among all non-ferrous metals. In addition, its electricity accounts for about 34%-40% of the total cost, so it is also called “solid-state electricity”. 1 kWh of electricity needs to consume about 400 grams of standard coal on average, and the production of 1 ton of electrolytic aluminum needs to consume an average of 5-5.5 tons of thermal coal. The cost of coal in the domestic electricity cost accounts for about 70-75% of the cost of electricity production. Before prices were not controlled, coal futures prices and Shanghai aluminum prices showed a high correlation.
At present, due to stable supply and policy regulation, the domestic thermal coal price has a significant price difference with the price of overseas mainstream consumption places. The FOB price of 6,000 kcal NAR thermal coal in Newcastle, Australia is US$438.4/ton, the FOB price of thermal coal in Puerto Bolivar, Colombia is US$360/ton, and the price of thermal coal at Qinhuangdao port is US$190.54/ton , the FOB price of thermal coal in the Russian Baltic port (Baltic) is 110 US dollars / ton, and the FOB price of 6000 kcal NAR thermal coal in the Far East (Vostochny) is 158.5 US dollars / ton. Low-cost areas outside the region are significantly higher than domestic. Natural gas prices in Europe and the United States are higher than coal energy prices. Therefore, domestic electrolytic aluminum has a strong energy cost advantage, which will continue to be prominent in the context of the current high global energy prices.
Due to the large difference in export tariffs for different aluminum products in China, the cost advantage of aluminum ingots is not obvious in the export process, but is reflected in the next process of aluminum. In terms of specific data, China exported 652,100 tons of unwrought aluminum and aluminum products in July 2022, a year-on-year increase of 39.1%; the cumulative export from January to July was 4.1606 million tons, a year-on-year increase of 34.9%. In the absence of significant changes in overseas demand, the export boom is expected to remain high.
Consumption is slightly resilient, gold, nine silver and ten can be expected
From July to August this year, the traditional consumption off-season encountered extreme weather. Sichuan, Chongqing, Anhui, Jiangsu and other regions have experienced power and production restrictions, resulting in the shutdown of factories in many places, but consumption is not particularly bad from the data. First of all, in terms of the operating rate of downstream processing enterprises, it was 66.5% at the beginning of July and 65.4% at the end of August, a decrease of 1.1 percentage points. The operating rate fell by 3.6 percentage points in the same period last year. From the perspective of inventory levels, only 4,000 tons of aluminum ingots were stored in the entire August, and 52,000 tons were still out of storage in July-August. In August, the accumulated storage of aluminum rods was 2,600 tons, and from July to August, the accumulated storage of aluminum rods was 11,300 tons. Therefore, from July to August, the state of destocking was maintained as a whole, and only 6,600 tons were accumulated in August, which shows that the current consumption still has strong resilience. From the terminal point of view, the prosperity of new energy vehicles and wind and solar power generation is maintained, and the pull on aluminum consumption will be throughout the year. The overall downward trend of real estate has not changed. The subsidence of the high temperature weather will help the construction site to resume work, and the launch of the 200 billion “guaranteed building” national relief fund will also help to improve the completion link. Therefore, we believe that the “Golden Nine Silver Ten” consumption peak season can still be expected.
Post time: Sep-09-2022
