In-Depth Analysis of the Primary Aluminum Market: Supply-Demand Dynamics Under High Energy Costs and Price Outlook

HW-A. In-Depth Analysis of the Global Primary Aluminum Market Landscape

​​A.Structural Changes in Capacity Distribution​​

The global distribution of primary aluminum capacity is undergoing profound restructuring. According to data from the International Aluminum Institute, as of the end of 2023, global primary aluminum production capacity reached 85 million tons, with China accounting for 57.4%, the Middle East for 6.8%, and Europe for 5.2%. This distribution has changed significantly compared to a decade ago: in 2013, China’s capacity share was 45.3%, and Europe’s was 8.7%. The trend of capacity transfer shows a high correlation with regional differences in energy costs.

In terms of capacity utilization rates, there is significant divergence globally. The Middle East maintains a high capacity utilization rate of over 98% due to its energy advantages, while in Europe, due to high energy prices, the capacity utilization rate has fallen below 85%. This divergence not only reflects the current cost structure differences but also indicates the direction of future capacity investment.

​​B. Impact Mechanism of Energy Structure on Costs​​

Electricity costs account for 35-45% of the production cost of electrolytic aluminum, and price differences directly lead to regional cost disparities. A detailed analysis shows:

• The Middle East relies on cheap natural gas, with power generation costs of only $0.02-$0.03/kWh.
• The cost of electricity from captive power plants in China is in the range of $0.04-$0.06/kWh.
• The cost of grid electricity purchase in Europe is as high as $0.15-$0.25/kWh.

This difference in energy costs means that for producing one ton of electrolytic aluminum, the Middle East has a cost advantage of $800-$1,200 compared to Europe. It is worth noting that with the introduction of carbon emission costs, this gap may further widen. The implementation of the EU’s Carbon Border Adjustment Mechanism (CBAM) is expected to add an additional cost of $100-$150 per ton for electrolytic aluminum production in Europe.

HW-B. The In-Depth Game of Supply and Demand Fundamentals

​​A. Strengthening of Rigid Supply-Side Constraints​​

The global primary aluminum supply pattern is undergoing structural changes. According to data from CRU Group and Wood Mackenzie, significant changes occurred in the global capacity distribution between 2020 and 2023.

Table 1: Changes in Global Primary Aluminum Supply Structure, 2020-2023 (Unit: 10,000 tons)

Data Source: CRU Group, Wood Mackenzie

The supply side shows the following significant characteristics:

First, the effect of China’s production capacity ceiling is apparent. The hard cap of 45 million tons is a rigid constraint, and new capacity must be achieved through equivalent or reduced replacements. This policy has significantly reduced the supply elasticity of primary aluminum in China.

Second, energy prices are driving regional capacity transfer. Europe has seen permanent shutdowns, with cumulative capacity reductions exceeding 1 million tons per year over the past three years. Particularly during the 2022 energy crisis, about 30% of European capacity was idled.

Third, the investment cycle has significantly lengthened. Affected by ESG requirements, the cycle from approval to operation of new projects has extended from the traditional 3 years to 5-7 years. Furthermore, project construction costs have also increased substantially. In 2010, building a 500,000-ton per year aluminum smelter required an investment of about $2billion;now,aprojectofthesamescalerequires$3-3.5 billion.

​​B. Accelerated Transformation of Demand Structure​​

The consumption structure of primary aluminum is undergoing profound changes. Growth in traditional application areas is slowing, while demand in emerging areas is growing rapidly.

Table 2: Primary Aluminum Consumption Structure and Growth Forecast (2023-2030)

Significant structural changes are evident on the demand side, mainly reflected in the following aspects:

New energy sectors have become the main demand driver. In transportation, aluminum usage in electric vehicles is growing rapidly and is expected to reach 12 million tons by 2030. Compared to traditional vehicles, EVs use about 40% more aluminum, mainly used in battery casings, motor components, and lightweight bodies.

The boosting effect of the photovoltaic industry is significant. Each GW of PV installation consumes 18,000-22,000 tons of aluminum, primarily for frames and brackets. According to IEA forecasts, global new PV installations will reach 650 GW per year by 2030, forming a stable base for aluminum demand.

The trend towards lightweighting continues to deepen. Aluminum use density in automobiles has increased from 120 kg/vehicle in 2010 to 180 kg/vehicle in 2023, and is expected to reach 220 kg/vehicle by 2030. This trend is evident not only in EVs but also in traditional internal combustion engine vehicles, which are using aluminum to replace steel to meet emission reduction targets.

​​C. Subtle Changes in Inventory Structure​​

Global visible inventory levels are showing new characteristics. LME registered stocks have gradually declined from their 2020 highs and are currently maintained at a relatively low level of 500,000-600,000 tons. Meanwhile, Shanghai Futures Exchange inventories remain around 300,000 tons. This inventory structure reflects a tight balance in the physical market.

More noteworthy is the change in the geographical distribution of inventories. The share of inventories in Asia has increased from 40% to 55%, while Europe’s share has decreased from 35% to 25%. This change not only reflects regional differences in supply and demand fundamentals but also suggests that regional price differentials may persist.

HW-C. Price Formation Mechanism and Outlook

​​A. Reshaping of Cost Support Structure​​

The global primary aluminum cost curve shows a significantly steeper characteristic. Analysis of costs from over 200 major aluminum smelters worldwide reveals:

• 25th percentile cost: $1,800/ton, mainly concentrated in the Middle East.
• 50th percentile cost: $2,200/ton, represented by Chinese captive power plants.
• 75th percentile cost: $2,700/ton, including Chinese grid power and some North American capacity.
• 90th percentile cost reaches $3,200/ton, mainly marginal capacity in Europe.

This steepening cost curve has significantly raised the price floor support. When prices fall below $2,500/ton,about30$2,200/ton, the proportion of loss-makers expands to over 50%.

​​B. Price Range Operating Mechanism​​

Based on historical data and fundamental analysis, the following price range operating framework can be established:

Table 3: Analysis of Primary Aluminum Price Range Operating Logic

Historical data shows that between 2010 and 2020, aluminum prices traded below $2,000for25$2,400-$2,800 range for 45% of the time. This indicates that this range has become the market’s equilibrium range.

​​C. Financial Attributes and Price Discovery​​

The influence of the futures market on prices is becoming increasingly prominent. This is mainly manifested in the following aspects:

In terms of position structure, the top 20 institutions account for 35% of LME open interest, indicating a relatively high market concentration. This structure means that position changes by large institutions can significantly impact short-term prices.

Regarding spread relationships, the spread between SHFE and LME aluminum prices fluctuates in a range of $100-$300, mainly influenced by exchange rates, tariff policies, and regional supply-demand differences. In recent years, due to relatively tight supply-demand fundamentals in China, SHFE aluminum has maintained a persistent premium to LME aluminum.

The shift in the term structure is noteworthy. Since 2021, the aluminum market’s term structure has shifted from contango to backwardation, reflecting the possibility that tight physical supply may persist.

HW-D. Impact of the Green Transition on the Market

​A. Formation Mechanism of Low-Carbon Aluminum Premium​​

With the global advancement of carbon neutrality, a stable mechanism for low-carbon aluminum premiums has formed. Currently in the market:

• The premium for hydro-powered aluminum is stable at $50-$100/ton.
• The premium for recycled aluminum is in the range of $30-$80/ton.
• Carbon footprint requirements: The EU CBAM mechanism is expected to add $100-$150/ton in costs.

This premium differentiation reflects the market’s increasing recognition of low-carbon products. In particular, automakers and high-end consumer goods companies are willing to pay a premium for low-carbon aluminum to meet their ESG goals.

​​B. Path of Technological Change​​

Technological progress is changing the industry’s cost structure, mainly reflected in:

Breakthroughs in inert anode technology are expected to reduce power consumption by 15%. Several demonstration projects are already in operation. If this technology can be scaled up, it will change the energy consumption structure of the entire industry.

The penetration rate of digital control systems is increasing. Using AI algorithms to optimize potline operating parameters can increase current efficiency by 2-3 percentage points, equivalent to saving 300-500 kWh per ton of aluminum.

Direct coupling of renewable energy is entering the demonstration stage. Projects where solar power directly supplies potlines have begun operation in places like the Middle East and Australia, offering the possibility of fully zero-carbon aluminum production.

HW-E. Strategic Suggestions for Market Participants

​​A. Strategic Adjustments for Producers​​

Facing the new market environment, producers need to adjust from the following aspects:

Optimizing the energy structure is imperative. Focus on deploying low-carbon energy sources like hydropower and solar PV, especially increasing investment in regions rich in renewable energy such as Yunnan and Sichuan. Simultaneously, implement energy-saving renovations for existing capacity to reduce energy consumption per unit of product.

Regional layout needs reconsideration. As regional differences in energy costs widen, transferring capacity to energy-advantaged regions becomes an inevitable choice. The Middle East, Southeast Asia, and other regions with lower power costs will be the focus of new investments.

Product structure upgrading is crucial. Increase the proportion of high-value-added products to over 40%, focusing on developing high-end products like automotive sheet, aerospace plate, and battery foil to reduce reliance on common aluminum ingots.

​​B. Risk Management for Processors​​

Processors need to establish a comprehensive risk management system:

Procurement strategies need diversification. Establish a three-dimensional procurement system combining “long-term contracts + spot purchases + futures”, with a recommended long-term contract ratio of around 60%, and spot and futures each accounting for 20%. This structure can ensure supply stability while maintaining some flexibility.

Cost pass-through mechanisms need innovation. Promote pricing models like “base aluminum price + processing fee”, and establish price linkage mechanisms with customers. For key customers, consider signing annual contracts with agreed processing fee adjustment mechanisms.

Inventory management requires refinement. Establish a flexible inventory mechanism based on price forecasts and manage virtual inventories through the futures market. When prices are below the cost support level, physical inventory can be appropriately increased; when prices are above the cost support level, inventory levels should be reduced.

​​C. Investor Decision-Making Framework​​

Investors need to establish a new analytical framework:

Cost curve analysis is fundamental. Focus on the 75th-90th percentile cost support, as the cost of this marginal capacity determines the bottom of the price range. Simultaneously, continuously track the impact of energy price changes on the cost curve.

The supply-demand balance sheet needs dynamic tracking. Key leading indicators to monitor include the inventory-consumption ratio and capacity utilization rate. When the inventory-consumption ratio falls below 5 weeks, it indicates a tight market supply; when it exceeds 8 weeks, oversupply may occur.

Spread trading opportunities need to be captured. Pay attention to arbitrage opportunities arising from regional spreads, basis spreads, and inter-commodity spreads. Particularly, the fluctuation of the spread between SHFE and LME aluminum prices often brings cross-market arbitrage opportunities.

HW-F. Market Outlook for the Next Three Years

Based on supply-demand balance model forecasts, the global primary aluminum market will exhibit the following characteristics from 2024 to 2026:

In terms of supply-demand balance, the global market is expected to maintain an annual supply deficit of 500,000-800,000 tons. The persistence of this deficit is mainly due to slowing supply growth while demand maintains steady growth.

Regarding price trends, the price center is expected to remain in the range of $2,500-$2,800/ton. The fluctuation range may be between $2,000-$3,200/ton, with overall volatility maintained at 15%-20%.

In terms of regional differences, due to relatively tight supply-demand fundamentals in China, prices may maintain a premium of $100-$200/ton over LME. In Europe, due to high energy costs, the local premium may remain high.

Key risk factors that require close attention include:

1. Energy prices exceeding expectations (Probability: 25%)
2. New energy demand falling short of expectations (Probability: 20%)
3. Sharp changes in the macroeconomic environment (Probability: 30%)
4. Escalation of geopolitical conflicts (Probability: 15%)

Conclusion

The primary aluminum market has entered a new pricing paradigm. Energy costs are no longer an external variable but a core factor determining the supply structure. The future market will be characterized by three major features: “high cost support, strong structural differentiation, and tight supply-demand balance.”

In the long term, the price fluctuation range will shift upward systematically, and the amplitude of fluctuations may narrow. Market participants need to establish new analytical frameworks and decision-making systems, shifting from traditional cyclical thinking to a dual-core analysis driven by both energy and supply-demand fundamentals.