Key Takeaway from SMM Automotive New Materials Summit Forum: Secondary Aluminium to Grow Faster than Primary Aluminium in Terms of Long-Term Supply and Demand under Dual Carbon Goals

SHANGHAI, Sep 27 (SMM) – At the 2022 (Fourth) China Automotive New Material Application Summit Forum - Automotive Low-Carbon New Materials Development Forum, Liu Xiaolei, Director of SMM’s Big Data Department, has made a detailed analysis and interpretation of the development status and future of China's low-carbon aluminium market from three aspects, namely the development of global low-carbon policies, the current supply status of China's low-carbon aluminium market, as well as potential consumption trend of low-carbon aluminium in China. SMM believes that with the advancement of the dual carbon policy and its impact on China's aluminium processing industry chain, the long-term supply and demand for secondary aluminium will grow faster than the primary market in the future. SMM predicts that the overall supply of low-carbon aluminium in Yunnan will increase by a large margin in 2025. And with the switching of end consumer demand industries, the development of the secondary aluminium market will maintain rapid growth.

Evolution of global low-carbon policy and its impact on industry development 

China's carbon dioxide emission policy began with the establishment of the Leading Group on Climate Change and Energy Conservation and Emission Reduction in 2007. In 2020, the goal of carbon peaking and carbon neutrality was proposed.  

Other developed countries have achieved carbon peaks after a long period of development, giving them enough time to achieve carbon neutrality by 2050. However, it is more challenging for Chin to achieve carbon peak by 2030 and carbon neutrality by 2060, especially considering the reality of China’s high-carbon energy consumption structure and annual carbon emissions exceeding 10 billion mt. 

In the future, China will achieve carbon neutrality through four carbon emission reduction methods in three stages. In 2020-2030, carbon emission reduction will be carried out on the demand side through various means, including industrial structure adjustment, energy conservation and emission reduction, and vigorous development of clean energy to achieve carbon peaking; in 2030-2045, through the development of renewable energy and hydrogen energy, clean and low-carbon supply-side adjustment will be achieved; the third stage is to reduce greenhouse gas emissions through CCUS technology from 2045 to 2060; deep decarbonization will be achieved through the development of carbon sequestration technology or biological carbon sinks, to fix carbon dioxide in the air and reduce the carbon concentration in the air.

To achieve carbon reduction and emission reduction, the carbon market is an important mechanism and measure. Through the carbon emission trading mechanism, the flexible circulation of carbon quotas among enterprises can be achieved so as to realise overall control of carbon emissions. At the same time, through the adjustment of the market mechanism, reward and punishment for carbon trading participants, greenhouse gas emissions can be directly reduced, which can promote the upgrading of the industrial structure of enterprises. 

With the advancement of the dual carbon policy, the impact on China's aluminium processing industry chain lies in that it has promoted the switching of aluminium processing enterprises from the traditional energy supply dominated by thermal power to the energy structure dominated by hydropower, solar energy, wind energy and other green energy sources. At the same time, it has also led to the regional redistribution of aluminium raw material supply. In addition, the promotion of the dual carbon policy has also led to a rapid increase in the demand for low-carbon aluminium processed products and the release of secondary aluminium supply and demand. SMM believes that the growth rate of secondary aluminium supply and demand will exceed that of the primary market in the long run. 

In addition, the design of carbon emission rights trading in the aluminium industry has been carried out, and it is expected to enter the implementation stage from 2022 to 2023, and the indirect cost caused by carbon trading will increase. And as China's aluminium production capacity is about to reach the ceiling under the supply-side reform, China's investment in overseas aluminium projects will accelerate under the restriction of the dual carbon policy.  

In 2021, the EU formally adopted the Carbon Border Adjustment Mechanism (CBAM) proposal. It covers the steel, aluminium, fertilizer, cement and power industries and is expected to serve as a pilot phase from 2023 to 2025. Starting from 2026, the EU will reduce the free quota of production enterprises by 10% year by year until the free quota is completely abolished in 2035. During the same period, product importers are required to pay carbon fees according to the carbon emissions generated in the production process of products, and increase the rate year by year. It is estimated that the complete removal of free quotas in the EU will increase the cost of aluminium by 7.6%, while the CBAM will increase the cost of aluminium exports from China to the EU by about 9%. 

With the advancement of carbon reduction and emission reduction at home and abroad, China's aluminium enterprises have also gradually begun to save energy and reduce carbon. In September 2022, the technical transformation plan for energy saving and carbon reduction of aluminium enterprises in Gansu Province was released.

At the same time, green power trading is an important supplementary tool for the low-carbon transformation of domestic aluminium enterprises. From the first proposal of the quota system and green certificate trading mechanism in 2016 to March this year, SDIC Guangdong Electric Power has signed a 25-year green power PPA agreement with BASF, the first such agreement in China. The development of green electricity trading in China is gradually improving.

In addition, power decarbonization, direct process carbon reduction, recycling and improving resource utilization efficiency are currently three main ways to reduce carbon dioxide in aluminium industry. China's low-carbon aluminium market supply started late, but Yunnan's low-carbon aluminium supply will increase significantly in the future In the production process of aluminium, from the procurement of raw materials, to production and smelting, and then to the manufacture of aluminium ingots, the production links are complex, and more than ten links can produce carbon dioxide emissions.

In order to better promote the low-carbon development of the aluminium industry, SMM has launched the China Low Carbon Aluminium Price. Unlike secondary aluminium prices, the SMM China Low Carbon Aluminium Price refers to the prices of aluminium that is produced in China with the unit carbon emissions less than 4 mt. Meanwhile, it must also meet the requirements that it is the prices in the spot market in China near the consumption area of Guangdong, for self pick-up at warehouses.

The composition of the SMM China Low Carbon Aluminium Price includes ordinary aluminium ingot price, carbon difference, and carbon price. The calculation formula is prices of common aluminium ingots + carbon difference * carbon price. Among them, the average carbon difference is calculated by SMM through the carbon emission model of 76 domestic aluminium smelters. The carbon difference base is updated on a quarterly basis. The carbon difference base of the latest SMM China Low Carbon Aluminium Price was calculated based on the carbon emission model in August 2021.  

The overseas low-carbon aluminium market is gradually maturing, and major suppliers have launched low-carbon aluminium brands, while China started relatively late in this regard.

According to SMM statistics, since May 2021, China's new aluminium production capacity has been concentrated in Yunnan and other provinces that are abundant in hydropower. As of 2020, the overall proportion of low-carbon aluminium in China was merely 13.3%. However, the overall supply of low-carbon aluminium in Yunnan will be greatly improved by 2025. 

China's potential low-carbon aluminium consumption trend 

With the gradual maturity of the low-carbon aluminium end demand market, upstream enterprises will be forced to carry out energy structure reforms. At present, aluminium smelters, aluminium processing enterprises and end enterprises are all adopting SMM prices for reference. 

The end drivers of aluminium semis have changed. The growth rate of primary aluminium consumption has begun to slow down. The engine of primary aluminium consumption has switched to the transportation industry, while growth rate of aluminium consumption in the durable goods and packaging sectors has been stable.  

SMM believes that the annual average growth rate of secondary aluminium consumption will exceed 10% in the next five years, outpacing that of primary aluminium.