Inflation comes for aluminum, as the everywhere metal surges

Aluminum is heading for a seismic shift as a long-running supply glut starts to fade, setting the stage for shortages and a price rally that could run for years.

Demand is set to surge on the back of climate-change investment, and mega-producer China — which accounts for more than half of global output — is cracking down on smelting to reduce pollution and meet green targets.

Those combined forces mean the oversupply that’s dominated the market for more than a decade is on the way out, leaving buyers bracing for a new era of scarcity and higher costs.

With aluminum a feature of everyday items, from food packaging and beer cans to iPhones and cars, what’s playing out in markets has implications for inflation and consumers’ pockets.

It’s already jumped 26% this year to about $2,500 a ton, one the best performers on the London Metal Exchange. Goldman Sachs Group Inc. is among those seeing more gains ahead, forecasting record prices above $3,000 by late next year. In the short term, the global economy’s post-pandemic rebound, and demand in the automotive and construction industries, are eating into inventories. But while in the past, supply kept pace with additional demand, that could change once China’s cuts kick in, leaving the market in a deep deficit by 2024, according to trading giant Trafigura Group.

“It takes quite a mindset change — some viewed buying aluminum similar to buying groceries in the supermarket,” said Philippe Mueller, head of aluminum trading at Trafigura. “It’s not going to work like this anymore.”

The metal isn’t alone in facing short-term issues. The combination of soaring demand and spluttering supply after Covid-19 disruption has upended many raw materials markets, all of which is feeding the global inflation scare that’s taken hold in some corners this year.

For aluminum, China’s actions are key. The government started cracking down in 2017, capping smelting capacity at 45 million tons a year, and its subsequent carbon emissions targets have dashed any expectations that policymakers might ease off on the sector.

“The government is serious this time,” Alison Li, co-head of base metals research at Mysteel, said by phone from Shanghai. “Now China has its carbon neutrality mission, we think they will stick to that limit.”

Actual production will reach about 40 million tons in China this year, so for now producers still have some room to boost output, according to Goldman Sachs. But the industry is likely to hit the ceiling by 2024, and from then on the Chinese market will move into deficit.

Producers elsewhere could help to plug the gap, but prices will need to rise substantially to make investment worthwhile, given higher costs for environmental compliance. Trafigura estimates aluminum needs to hit $3,500 within the next year to prevent shortfalls, given the timelag to build new smelters.