Global Aluminum Supply Constrained by Energy Costs, Russia-Ukraine Conflict

February 1, 2022

The price of aluminum has climbed 24% in the last six months, reaching the highest level in nearly a decade. With production stymied by surging energy costs, ongoing supply-chain disruptions, and mounting tensions between Ukraine and Russia, supply is expected to fall short of demand in the coming year, meaning higher prices for manufacturers.

Smelting aluminum is a very energy-intensive process, and energy expenses can account for up to half the cost of making aluminum. As energy prices surge around the world, producers in Europe and China have opted to close plants. Closures have taken about 4 million tons of annual production offline of the roughly 67 million tons of primary aluminum, meaning aluminum made from raw materials rather than scrap metal.

Based on current closures, Morgan Stanley estimates that the aluminum supply could fall 1 million tons short of demand this year, but the supply could determine further, particularly if conflict breaks out between Ukraine and Russia. Russia is one of the world’s primary aluminum producers, and traders worry that exports would be severely disrupted if the situation escalates.

Stockpiles of aluminum in warehouses approved by the London Metal Exchange have fallen to the lowest level since 2007 and are less than half what they were in March 2021, according to data from FactSet.

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