Aluminum demand has skyrocketed this year, with prices reaching an all-time high in March.

The post-pandemic consumption boom saw strong demand for electric vehicles, refrigerators, and renewable-energy equipment, all of which contain silver-gray metal.

Futures dealers are scrambling to limit price risk in the face of such demand and price volatility.

Demand is so strong that physical aluminum trading volume tripled from Q1 to Q3 2022, with a record 3,700 contracts changing hands daily, according to CME Group.

To further build the business, the CME partnered with financial services firm Marex in October to provide its clients with access to its base metals suite.

“Clients have approached us seeking a credible alternative to risk management in the aluminum area and the wider base metals industry.” CME’s Managing Director and Global Head of metals, Jin Chang, stated at a recent Open Markets Exchange of Ideas event. “Volatility is here to stay, and we need suitable risk management tools to handle it, as well as price discovery transparency.“

Andy Massey, Vice President of Metals, Procurement, and Transportation at Bonnell Aluminum in the United States, stated that EV demand remains strong, supporting present and future needs for the lightweight alloy. “Right now, the aluminum market is exploding,” he said. “Aluminum is increasingly being used in automobiles. We used to get thrilled about 300 pounds per vehicle, but now we’re getting 500 to 800 pounds with some of the EV versions. It’s a massive leap.“

Market Value of $240 Billion

Purchases of aluminum, which is also used to construct airplanes and renewable energy equipment like wind turbines and solar panels, remain high in the United States, while they have softened in Europe and China, according to Massey.

Europe has been harmed by the Russia-Ukraine conflict and rising energy prices, while China has been harmed by its rigorous zero-covid policy as well as droughts in major agricultural areas.

Overall, growth is likely to be solid, with base metal sales expected to reach $238 billion by 2028, up from $142 billion last year, according to SkyQuest Technology Consultancy.

“The long-term picture for aluminum metals is positive,” Chang remarked. “This is because it’s a critical ingredient in the clean energy transition while aluminum and copper are also highly significant components in electric vehicles.“

According to SkyQuest, the automobile sector is the world’s largest consumer of aluminum, producing over 67 million vehicles per year.

China is the largest producer, accounting for 60% of total output, followed by Russia, Europe, and the United States. According to an ING report from October, the globe produced 68.9 million metric tons of aluminum in 2022.

‘Taking a Loan from the Future

However, as the globe prepares for a possible recession (the International Monetary Fund just reduced its global GDP forecast to 2.7% from 3.8% in January), concerns about a worldwide supply surplus are mounting.

Excess inventory, according to Jorge Vazquez, head of leading consultant Harbor Aluminum, is becoming a significant issue.

Already, demand is softening, suggesting that pandemic-induced oversupplies would struggle to find a home, reducing margins and pressuring companies to cut prices.

“During the pandemic, people bought new homes, boats, motorcycles, and even washing machines,” Vazquez explained to Chang in a recent interview. “In a 12-month period, we acquired more than we would have purchased in a three-year span. In other words, we borrowed future demand.“

This, according to Vazquez, will reduce consumption and derail prices in the following months. “Things will get a little more tricky,” he added, with increased borrowing rates and a lack of economic stimulation.

Impact of Sanctions

When asked how a new wave of US sanctions against Russia may affect the sector, Vazquez said a repeat of the 2018 regime would cause prices to skyrocket.

“If the US bans Russian aluminum for whatever reason, if they repeat what they did in 2018 when US and non-US persons were barred from buying or serving enterprises outsourcing Russian aluminum, the price and premiums will skyrocket,” he explained. “However, because we import so little from Russia, the impact on price and premiums will be insignificant if the US just bans Russian aluminum in the US or raises taxes.“

When Washington put tariffs on Russian aluminum giant Rusal in 2018, prices skyrocketed.

“Initially (shortly after Russia’s invasion), the fear of sanctions was palpable, but the market has moved on,” says Guy Wolf, Marex’s worldwide head of market analytics. “In 2018, when the United States placed sanctions on Russian aluminum, local customers were the only ones who suffered. Automobile manufacturers in the United States were suddenly faced with a major cost disadvantage.“

What to Look Out For

Meanwhile, the panelists talked about some of the significant events to look out for in 2023.

“If I had to select one thing, I would watch the (base metal) output, especially aluminum, and look at demand to see where it’s heading,” Massey said. “I doubt the economy will be as bad as predicted next year, and I doubt there will be any surplus at all.“

Wolf, for one, has stated that he will keep an eye on costs. “I’d consider inflationary expectations,” he remarked. “Central banks are slightly incorrect in believing that the recent inflation crisis is due to excessive demand. Inflation is significant due to the one-time energy shock caused by the Ukraine issue.“

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