A couple of weeks ago, Metal Bulletin published a piece by Jethro Wookey looking at the cloudy future for European primary aluminium production.
As he pointed out, the price of aluminium has severely underperformed over the last decade or so, which has seen strong performances from other commodities.
If we look further back in history, the point becomes even more clear. Just before the second world war, for example, the inflation-adjusted dollar-equivalent MB world metal price was about $3,800 for copper, about $1,300 for zinc and about $1,360 for lead. The figure for aluminium was about $8,000.
Since those prices are inflation-adjusted, increases between then and now are presumably down to increased pressure on demand, the increasing cost of extraction and refining, or some combination of those two factors.
We know that both are relevant; demand has obviously increased over the last 70-odd years in a growing global economy, and it’s pretty clear that the overall cost of mining and smelting has become, relatively, greater.
So it would not be a particular surprise to see that metal prices in real terms are higher now than then. Indeed, in the case of copper, zinc and lead that is exactly what we see.
Aluminium does not reflect that same trend, however, although I suspect very strongly that the relative demand increase for it would outstrip the other metals. Indeed, the future demand picture certainly looks to be very healthy.
So why does the price not seem to reflect this?
Aluminium basically consists of two things – mineral raw materials and power.
We know that known bauxite reserves will be sufficient for a very long period to come, even with the most optimistic demand growth estimates.
Since it is mostly surface-mined, the degree of difficulty and cost of extracting bauxite is pretty low, so supply is not going to give huge support to the price.
Bauxite is also available in countries featuring all sorts of different governments and political structures, so it is unlikely that too much restrictive governmental pressure will be put on its supply.
So what about the other element of the cost of aluminium – the power requirement?
Energy costs have undoubtedly risen sharply, particularly in the past decade or so. Yet during that time, although aluminium has had its moments, the truth is that it has significantly underperformed when compared with other metals.
The uncomfortable truth this leads to is that aluminium is in fact a cheap material. It is undeniably a very good product, with its combination of strength and weight, but the world’s demand is able to be satisfied at a relatively low price.
The very long-run price curve is a downward slope, and while one would expect that slope to flatten out, it is difficult not to draw the conclusion that, however much some may love to see the price rally, it is unlikely to happen.
Despite the apparent problem created by rising energy costs, the reality is that smelter construction does not appear to have been inhibited.
As long as smelters can be located on top of oil or gas fields, or next to hydro-power grids, and as long as governments have an appetite for the employment those smelters create, we will not see demand outstripping supply for years to come.
This will sound the death-knell of the industry in areas that do not enjoy easy access to relatively low-cost power – what Japan did in the 1980s will inevitably happen elsewhere in years to come.
Whistling in the dark and dreaming of the time when the price goes up again is not a realistic approach.
If the world is oversupplied enough to be able to use smelted aluminium as counters in the warehouse game at current prices, why would we expect a sustainable price rise?