Aluminum's Surge Is Really an Energy Crisis in Disguise
Aluminum’s Surge Is Really an Energy Crisis in Disguise
By David Fickling | Bloomberg
Yesterday at 5:30 a.m. EDT
There’s an odd exception to the list of best-performing raw materials this year. ... While the 64% gain in the Bloomberg Commodities Energy index since the start of the year has comfortably outstripped the 25% improvement in industrial metals, one major element has been behaving more like natural gas, coal or oil: Aluminum, which hit $3,000 a metric ton — its highest level in 13 years — earlier this month.
That may be less surprising than it seems. Producing it involves using massive electrical currents to melt alumina, essentially the same substance that sapphires and rubies are made from. Energy typically accounts for a third or more of the cost of aluminum — so when the price of energy rises, you can expect metal prices to do the same. In that sense, the aluminum’s spike is another minor energy crisis analogous to the surging value of European gas and Australian coal.
That effect is often muted in Europe and North America, because hydroelectricity has traditionally been the cheapest way of providing aluminum producers with the low-cost power they need. With smelters hooked up directly to a dam that’s fueled for free by rainfall and gravity, power contracts are typically long-term and unaffected by the state of demand elsewhere in the grid. (Indeed, some smelters are even looking at turning electricity from a cost into a source of revenue, by offering to turn down the current during periods of high grid demand in return for payments for their role in balancing the network.)
Europe and North America aren’t where the action has been in aluminum over recent decades, though. In China, which consumes nearly two-thirds of the world’s aluminum, close to 90% of smelters are powered by coal — often as the linchpins of provincial grids developed over the past two decades to electrify the nation.
Prices for that commodity have been off the leash over the past year, as surging energy demand and still-insufficient renewable capacity has crashed into President Xi Jinping’s targets of peaking emissions by 2030 on the way to net zero three decades later. Thermal coal futures on the Zhengzhou commodity exchange hit a record of 1,237.8 yuan ($191.58) a metric ton last week, nearly double their level 12 months earlier. That’s dragged up aluminum, too.
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Aluminum smelting is not just a matter of melting alumina (Al₂O₃
. In aluminum smelting, a flow of electricity causes the oxygen atoms to separate from the Al₂O₃ molecule in a process called electrolysis reduction. Once aluminum reduction cells (pots) are started, they cannot economically be allowed to shut down. They must run 24/7/365. That requires a large, predictable electricity source.
In aluminum production, the costs of electricity dwarfs the costs of mining bauxite, refining bauxite to alumina, and shipping huge quantities of bauxite and alumina from one location to the next.
When I was a college student in the late '70s, I worked during the summers in an aluminum reduction plant in Arkansas that had been constructed as part of the WWII buildup. (At that time bauxite was mined in Arkansas.) Aluminum was so important to the war effort that generators designed for diesel-electric submarines were diverted to produce aluminum. Fifty-odd years later, the old generators still produced electricity.
