Here\’s the pitch. Energy prices are way up, the bulk of the cost of aluminium is energy in production, so shouldn\’t aluminium rise in price?
We were all rocked by the news that British Gas had imposed a whopping 35 per cent increase on energy bills – and its rivals will undoubtedly follow suit in the coming weeks. This is a huge blow to households already wilting under higher mortgage costs, higher food costs and higher petrol prices. An aluminium exchange traded fund, which tracks an aluminium index, could be a route to profiting from the sky-high energy costs.
The manufacture of aluminium uses immense amounts of energy: it takes 15,000kWh to make a tonne of aluminium, compared with 67kWh for lead. Again, supply is constrained yet the metal is used by the automobile industry and in consumer durables, mobile phones, LCD televisions, MP3 players, cans and foil. Again, experts argue that the growth of China will fuel the demand, which they reckon will outstrip that for any other metal.
Well, mebbe. Except the aluminium companies know the energy cost of Al of course. So the plants are deliberately put in places where there\’s lots of cheap energy. Indeed, lots of energy that cannot be used in other ways. Like hydro projects in the wilds of Quebec, or Iceland for example.
Sure, there\’s some effect (it\’s been known in times of high energy prices on the West Coast for Al companies to turn off their pots and make more money selling the electricity they buy on long term fixed price contracts from hydro plants than bothering to use it to make Al) but a great deal of the industry relies upon power that can\’t be used any other way. Deliberately so. Indeed, many dams have been built specifically to feed Al plants….rather than build the dam and then set up hundreds of miles of high voltage cable to export the leccie (with all the associated transmission losses) it\’s cheaper by far to import the alumina and export the Al and the electricity embedded into it.
This doesn\’t mean that Al won\’t rise in price….just that it\’s not a bet that I would take on this basis.