The rising trend of aluminum prices at home and abroad in 2021 can be described as "riding without dust". As of Sept. 7, Shanghai aluminium prices hit a 10-year high, approaching the peak set at the global economic peak in 2006. We believe that the logic of the rise in aluminum prices is mainly about the "story of supply" and that the recovery in demand may have played a role in the first half of the rise in aluminum prices (April 2020 to the first quarter of 2021). However, the second half of the rise in aluminum prices (mainly since the second quarter of 2021) may not be the main driving force. Another secondary factor is that under the global liquidity easing, the financial attribute of aluminum has been strengthened to a certain extent, and investment demand has also played an important role in the second round of aluminum price rise.

The Story of supply

First, the recovery of overseas aluminium supply is weak. In March 2020, the global epidemic raged, and aluminum consumption at home and abroad once suffered a sharp decline. However, with the resumption of production in China and the shutdown of the overseas economy, aluminum has rebounded in the case of a mismatch between supply and demand, and has continued to rise. The mismatch between supply and demand is reflected in: first, the restorative growth of demand, domestic real estate investment recovers most rapidly with the support of monetary and fiscal policies, while the rise in overseas durable goods consumption drives China's exports, which indirectly drives the demand for industrial aluminum profiles. Second, the overseas epidemic has hindered the recovery of electrolytic aluminum output in countries such as the United States, Australia, Russia and other countries, so the late rise in aluminum prices is mainly due to supply constraints. Third, the expansion of domestic electrolytic aluminum production capacity is restricted. With the official landing of carbon neutralization and carbon peak in 2021, the aluminum smelting industry with high carbon emissions has been affected: first, capacity expansion has been hindered. In order to achieve carbon peak in 2030, central ministries and local governments have implemented one-size-fits-all measures at the beginning to vigorously reduce the production capacity of the "double-high" project. On the other hand, carbon emissions increase the carbon emission cost of electrolytic aluminum, and the price of electrolytic aluminum rises when the cost of electrolytic aluminum is expected to increase. Data show that aluminum smelting has the highest carbon emissions in non-ferrous metal smelting and processing, with unit CO2 emissions reaching 11818 kg.

Secondly, the domestic electrolytic aluminum production capacity is restricted by the ceiling. Since 2013, the state has introduced various measures to curb overcapacity of electrolytic aluminum, and a consensus of 45 million tons of capacity ceiling has been formed in the industry by 2017. In 2013, the State Council issued the guidance on resolving the contradiction of serious overcapacity; in 2015, the Ministry of Industry and Information Technology issued the notice on the implementation of capacity replacement in some industries with serious overcapacity; in 2017, the National Development and Reform Commission and other four ministries issued the Circular on the Action Plan for cleaning up and rectifying illegal projects in the Electrolytic Aluminum Industry. In 2018, the Ministry of Industry and Information Technology issued the notice on matters related to capacity replacement in electrolytic aluminum enterprises through merger and reorganization, these measures are guiding electrolytic aluminum production capacity from disorderly expansion to steady growth, and the situation of overcapacity has been alleviated.

Finally, it is difficult for electrolytic aluminum enterprises to reach full production due to power restriction measures and double control of energy consumption in many provinces, cities and regions in 2021. According to statistics, from January to August in 2021, the provinces, cities and regions that experienced power cuts included Inner Mongolia, Yunnan, Guangxi and Guangdong, while the regions with more electrolytic aluminum production capacity in China were distributed in Shandong, Xinjiang and Inner Mongolia, accounting for 53.71% of the total. However, the new capacity in 2020-2021 is mainly in Yunnan, Inner Mongolia and Guangxi, so power cuts may reduce the supply of electrolytic aluminum by 1.5 million-2 million tons. In the first quarter of 2021, the National Development and Reform Commission named the double control of energy consumption for failing to meet the standards, thus affecting production capacity of about 300000 tons.

The impact of electricity price policy on aluminum smelting is limited.

On December 13, 2013, the National Development and Reform Commission and the Ministry of Industry and Information Technology issued the notice on the implementation of ladder electricity Price Policy for Electrolytic Aluminum Enterprises. If the AC power consumption of liquid aluminum electrolysis in electrolytic aluminum enterprises is not more than 13700 kilowatt hours per ton, the electricity consumption of liquid aluminum electrolysis (including electricity from self-provided power plants) shall not be increased; if it is higher than 13700 kilowatt hours per ton but not more than 13800 kilowatt hours, the electricity consumption of liquid aluminum electrolysis shall be increased by 0.02 yuan per kilowatt hour. If it is higher than 13800 kilowatt-hours per ton, the electricity consumption of liquid aluminum electrolysis will be increased by 0.08 yuan per kilowatt-hour.

On August 27, 2021, the National Development and Reform Commission issued the Circular on improving the ladder electricity Price Policy of the Electrolytic Aluminum Industry, deploying various localities to improve the ladder electricity price policy of the Electrolytic Aluminum Industry, promote the electrolytic aluminum industry to continuously improve energy efficiency, reduce carbon emission intensity, and serve the economic and social development of green and low-carbon cycle.

We believe that the improvement of ladder electricity price policy has a limited short-term impact on aluminum smelting, on the contrary, it is conducive to aluminum smelting to continue to reduce energy consumption. On the one hand, the proportion of substandard comprehensive power consumption of electrolytic aluminum in China is very small, which means that the range and scale of electricity price increase are also very small. With the progress of technology, the comprehensive power consumption of electrolytic aluminum will be further reduced in the future. On the other hand, the notice encourages electrolytic aluminum enterprises to improve the level of clean energy use, which means that the proportion of aluminum smelting capacity using clean energy will increase in the future, reducing the future aluminum supply gap and smelting costs.

The coup in Guinea did not hinder the supply of bauxite.

Guinea, known as the "kingdom of bauxite", is rich in reserves, widely distributed and easy to mine. According to information released by the US Geological Survey, Guinea has proven reserves of 40 billion tons, accounting for more than 1/3 of the world's proven reserves. Guinea has been one of the main sources of China's bauxite imports, and its proportion has been gradually increasing in recent years. China's imports of bauxite from Guinea accounted for 44 per cent of total imports in 2019; in 2020, China imported 111.587 million tons of bauxite, an increase of 10.9 per cent over the same period last year, of which 52.6701 million tons were imported from Guinea, accounting for 47.2 per cent of total imports, an increase of 18.51 per cent over the same period last year.

We believe that as the domestic bauxite port inventory is relatively sufficient, and with the high aluminum price, the benefit of using domestic bauxite has been significantly improved, which means that as long as Guinea resumes exports for no more than half a year, then there will be no shortage of raw materials for bauxite in domestic aluminum smelting.