Global aluminium prices have jumped a sharp 18% in March so far compared to those at the end of January, fuelled by rising geopolitical risks amid the ongoing Russia-Ukraine war, rating agency Icra said. Prices touched an all-time high of $3875 per tonne in the first week of March 2022 and are currently at $3320, indicating severe tightness in global supply, the report added.
In a note on the global primary aluminium industry, Icra said, given a tight demand-supply balance and low inventory level of aluminium worldwide, any sanction on Russian aluminium exports will aggravate the metal availability in the rest of the world, keeping prices at a high level till normalcy is restored. Russia contributes almost 12% to global trade in aluminium with exports primarily diverted to Europe.
Another major factor contributing to the aluminium price rise is the elevated power cost in the European countries, the ratings agency said.The energy exchange rates have increased by almost 3 times in Europe since September 2021, resulting in significant smelting cost pressures. At the current power tariff at energy exchanges, the power costs to produce one tonne of aluminium are even higher than the current LME spot aluminium prices, the Icra note said.
Consequently, almost 0.7 mtpa of capacity (15% of installed capacity in Europe) has already been shut down since Q4 CY2021. Since Russia is the major exporter of natural gas (41%) to Europe, any restriction in gas supply could further aggravate the energy crisis situation in Europe.
Given the elevated power costs, aluminium production in Europe will remain severely impacted, which is also reflected in month-on-month decline in production in recent months, the note said. Disruption in alumina supplies from Ukraine, faced by leading Russian producer Rusal, and aluminium capacity cuts effected by Chinese authorities in CY2021 to the tune of 2.0 million MT (mmt), are expected to keep aluminium supply constrained, and therefore keep prices elevated in the near term.
Jayanta Roy, senior vice-president and group head, corporate sector ratings, ICRA said, “Domestic primary aluminium producers are better placed as their energy requirements are met primarily through coal-based captive power plants, and over 2/3rd of their overall coal requirement is met through captive mines/linkage coal from Coal India. Consequently, favourable aluminium prices would strengthen profitability and coverage indicators of domestic players in FY2023. Besides the favourable domestic demand, the export prospects too remain bright, given the global supply tightness.”