(Repeats Monday's column with no changes to the text)
By Andy Home
LONDON, Jan 24 (Reuters) - Global aluminium production rates
started falling in the closing months of 2021 as power
constraints spread from China to Europe.
The world's smelters may have produced a record 67.3 million
tonnes of aluminium last year, but all the 3% year-on-year
growth derived from the first couple of months.
Annualised run-rates peaked in February at 68.3 million
tonnes and slowed to 66.2 million in December, year-on-year
production growth turning negative in both November and
December.
The resulting supply gap has propelled aluminium prices to
decade highs, the London Metal Exchange (LME) three-month price
currently sitting above the $3,000-per tonne level, last
trading at $3,030.
Physical premiums are also soaring, adding to the pain for
aluminium buyers.
Such high prices should incentivise more supply, but
everything depends on whether the world has sufficient energy to
support power-hungry aluminium smelters.
CHINA POWERS DOWN
China, the world's largest primary aluminium producer, was
operating at an annualised rate of 37.6 million tonnes in
December, according to the latest assessment by the
International Aluminium Institute (IAI).
That's 1.3 million tonnes lower than in December 2020 and
2.1 million tonnes off the February peak.
Drought in hydro-powered Yunnan province curtailed output in
what has become a major "green" aluminium production hub earlier
in the year.
More smelter hits came in the second half of 2021 from the
government's dual-control energy efficiency targets, which
resulted in several provinces mandating curtailments of heavy
industry, particularly intensive power users such as aluminium
smelters.
China has been the driver of global primary metal production
growth for two decades, but the juggernaut seems to have run out
of road.
The country turned net importer of unwrought aluminium and
alloys in 2020, and imports rose further last year to a record
high https://www.reuters.com/markets/commodities/china-2021-aluminium-imports-rise-annual-record-high-2022-01-18
of 3.2 million tonnes.
China remains a massive net exporter of semi-manufactured
products, but has been importing ever more primary metal to make
them.
EUROPEAN POWER CRUNCH
China's power woes have spread to Europe with a vengeance.
Analysts at Citi estimate around 800,000 tonnes of smelter
capacity has been curtailed in the region, with up to 1.2
million tonnes at risk from soaring power prices. ("Global
Commodities - Ex-China aluminium deficit looms large", Jan. 19,
2022).
Production in both Western and Eastern Europe slipped
marginally last year, with run-rates in the former slowing
appreciably over the fourth quarter.
A strike at Alcoa's 228,000-tonne per year San
Ciprian smelter in Spain was already acting as a drag on
regional output before the company announced it would suspend
production for two years https://investors.alcoa.com/news-releases/news-release-details/2021/Alcoa-Reaches-Agreement-on-Future-of-San-CiprinSmelter/default.aspx
as part of a peace deal with unions.
As other smelters https://www.reuters.com/business/energy/europes-aluminium-smelters-cut-output-power-crunch-intensifies-2022-01-13
reduce amperage or fully curtail potlines due to runaway spot
power prices, the slowdown in European output will become more
pronounced over the coming months.
Europe's primary metal supply shortfall is forecast by Citi
to expand from 3.5 to 4.2 million tonnes.
The growing supply-chain tension is why the European
duty-paid premium over the LME cash price has exploded
from under $300 per tonne in December to a current $442.
WESTERN RESTARTS
Europe's aluminium production woes will last as long as the
rolling energy crunch and maybe longer if this year's high spot
prices become embedded in higher forward pricing structures.
Output, however, should pick up in both North and Latin
America.
A 2.4% drop in North American output last year was largely
down to a four-month strike at the Kitimat smelter in Canada,
production at the 432,000-tonne-per-year plant falling to
263,000 tonnes in 2021.
The strike ended in October and the plant will undergo a
controlled restart this year, according to operator Rio Tinto
.
Argentina's Aluar smelter will also be returning to full
400,000-tonne capacity this year after running at 75% during the
COVID-19 pandemic.
Meanwhile, the 447,000-tonne-per-year Alumar plant in Brazil
will be brought out of mothballs https://www.reuters.com/markets/commodities/south32-alcoa-restart-alumar-aluminium-smelter-brazil-2022-01-05
by its joint owners Alcoa and South32 this year thanks
to a renewable power deal.
Latin America saw the fastest production growth of any
region last year and is on track to remain a significant driver
of global run-rates this year.
CHINA CONUNDRUM
However, whatever happens in the rest of the world pales
into insignificance relative to China, which last year still
accounted for 57% of the world's primary aluminium production.
Citi estimates potential restarts and delayed new smelters
could amount to three million tonnes per year of production
capacity coming on line this year.
That would have global implications, both dampening China's
appetite for primary metal imports and boosting its exports of
semi-manufactured products.
However, here too everything hangs on energy and power.
Beijing remains committed to peak coal usage by 2025 but
it's clear that last year' dual-control energy targets were too
severe, requiring a series of policy adjustments, not least
orders to domestic coal operators to boost production into
winter.
There will probably be a lot more fine-tuning by
policy-makers seeking to balance decarbonisation with the
country's still fast-growing energy requirements.
That may open a regulatory window for aluminium operators to
restart idled and launch new capacity to capitalise on the
current boom in prices.
But China's pledge to start phasing down coal use from 2026
still spells big trouble for its primary aluminium sector.
Despite a collective rush to tap Yunnan's hydro-energy grid,
coal remains the dominant power source for the country's
smelters, accounting for 88% of the 37 million tonnes of
aluminium produced in 2020, according to the IAI.
Targets may be adjusted in the coming months, but last
year's crunch may be the first of many, which is why so many
analysts are talking about a fundamental shift in China's
aluminium dynamics.
Moreover, Europe's lengthening list of smelter casualties is
a warning sign that power availability poses a fundamental
challenge for the aluminium industry globally.
The opinions expressed here are those of the author, a
columnist for Reuters.
(Editing by Jan Harvey)
Rio Tinto (RIO)
