Figure 1: China’s aluminium apparent demand growth

Aluminium touches most aspects of everyday life, and is used in products including cans, foils, kitchen utensils, window frames and aviation components. Importantly, it is a core component of electric vehicles (EVs). Not only is it found in the chassis and wheels of the car, but it is used in the cases that carry the electric batteries in EVs. Demand for aluminium is therefore aligned with that of EVs. 

As China continues to diversify and upgrade its automotive and aerospace industries, this creates a consistent demand for aluminium. So, it is hardly surprising that Middle Kingdom is the world’s most prolific producer of this light metal with 37 million metric tonnes produced in 2020 – Russia and India tying for a distant second place at 3.6 million each.⁶

Although the most abundant metal in the earth’s crust, aluminium first has to be extracted from compounds; the dominant one being bauxite. Once mined, the ore is chemically extracted and refined into alumina, an aluminium oxide compound, and then smelted into aluminium metal. Primary aluminium production is highly CO₂ intensive and, notes the Deutsche Bank Research team, “production in China is heavily reliant on coal power”.

“Metals produced and processed with green energy will become more economic and be better priced as long as demand exceeds supply”
Sandra Primiero, Global Head of Natural Resources Finance, Deutsche Bank

As Wood MacKenzie Senior Consultant Xinlin Chen explained in a May 2021 note, “In the past, Chinese producers would strategically choose locations for new smelter projects based on local power tariffs and where self-generated or captive power plants were permitted. This is a more cost-effective solution. However, the strategy of building power plants first and aluminium facilities later has become harder to sustain under China’s goals to control energy consumption and achieve carbon neutrality.”

Transitioning from coal-fired smelting to taking power from the grid which, by 2030, would have a higher percentage of renewable energy in the power mix” is something, says Chen, that the government is providing support for. She continues, “Grid-powered smelters are less at risk and only face the task of increasing operating efficiency and reducing energy consumption. Local grids and power plants will take responsibility for the transition to cleaner energy in the region, leaving a greener carbon footprint for energy-intensive manufacturing. Smelters in Yunnan, Qinghai and Sichuan provinces are adopting grid hydropower, to avoid government intervention and policy-driven suspensions.”

Chinese smelters, having hitherto enjoyed cost efficiency from their own coal-fired electricity will find themselves subject to grid company charges, and, Chen, forecasts, this resetting and relocation of the aluminium industry to renewable-rich regions in China “will inevitably cause the industry’s power tariffs to rise”. In the long run, she adds, increased scrap recycling will be needed to ensure lower carbon emissions production while meeting increased metals demand in China. “Producing secondary aluminium requires a fraction (< 5%) of the energy required to produce primary aluminium, so it is a more sustainable process.”

Commenting on this transition, Deutsche Banks’s Global Head of Natural Resources Finance, Sandra Primiero reflects, “Energy from renewable resources, and especially if transformed into green hydrogen e.g. for transportation, is not the more economic energy form at the moment. However, with scale effects kicking in, and with demand focussing on metals produced and processed with green energy they will become more economic, and be better priced as long as demand exceeds supply.” She adds, “Because of this, I am sure that the investment into renewable energy sources will pay off: environmentally, and economically.”

Figure 2: Oil market balance transitioning to oversupply in 2022

Another market that the report looks at is crude oil. Having seen the first wave of Covid-19 prompt a 30-year low oil price when the price of US crude went from US$18/bbl to -US38/bbl on 20 April 2020 as producers had to pay buyers to take the barrels of oil they could not store once storage facilities were full (see Figure 2) – global oil production is again poised to outpace demand.

At present, oil prices directly increase (or decrease) disposable income, as it is the most traded commodity and significantly impacts global transport costs. For this reason, their movement impacts inflation and economic growth.

The International Energy Agency points to output in the US and OPEC+ countries and, it notes, “as this upward trend extends into 2022, the US, Canada and Brazil look set to pump at their highest ever annual levels, lifting overall non-OPEC+ output by 1.8 million bbl/ in 2022.⁷

In the Commodities Outlook, the Deutsche Bank Research team notes that although they had already assumed that OPEC would halt supply increases, the impact of the February 2022 supply ramp-up was somewhat offset in December 2021 to January 2022 by the Libyan outages and pipeline maintenance, and OPEC+ member countries such as Angola, Nigeria and Russia falling short of allowed production increases. The team’s “bearish one-year view on crude oil prices” with Q1 2022 as a transition quarter from excess demand to excess supply forecasts Brent at US$64/bbl and WTI (US crude) at US$60/bbl.