Invest in Aluminium?

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.


3 thoughts on “Invest in Aluminium?”

  1. Can they always pass on energy costs anyway? What are the relative cost structures of substitutes?

    God if investing was that easy…….

  2. But it is a bet, Tim, that ought to have you looking into a straddle-type of investment, i.e., selling Al outfits using some types of electrical generation and buying those of the mentioned types (low cost and not much else to do with it).

    The ordinary price rise (due to increased electrical costs) of aluminum is liable to affect the former drastically as the competition of the others (who are, in effect, selling cheap, otherwise unusable power) keeps prices from rising as much as they need to maintain current profitability.

    I don’t know the industry–but it’s highly likely that the bigger players have plants in both types of places, so care need be exercised.

  3. There’s also the issue of China, which has both expensive electricity and makes a huge proportion of the world’s aluminium.

    Tim adds: Not sure: certainly, I never really think of China as a major source of Al.
    The production figure there is large (5 or 27 global production), but the China figure includes production of secondary Al (ie, from scrap) and that is a big part of Chinese production. They’re huge importers of scrap.
    I don’t know the real answer about whether China is a major primary producer or not…..even if they are, I suppose they’ll use it internally rather than export it.

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