How Aluminium Market Works


It may be hard to believe but only 150 years ago aluminium was considered to be silver from clay and an extremely expensive kind of metal. Today, aluminium ranks number two in the consumption volumes among all the metals, surpassed only by steel. In the coming decades the demand for aluminium will continue increasing at unstoppable rates. Recent developments in the motor industry, the rapid growth of cities, new potential uses of aluminium as a substitute to copper in the power industry – these and many other trends mean that the winged metal is well placed to strengthen its dominant position as a key structural material of the 21st century.

«Sooner or later aluminium will replace wood,
probably stone too. And how luxurious that is!
Aluminium and aluminium everywhere.»

Nikolay Chernyshevsky
"What Is to Be Done?", 1863
During the period from 1854 until 1890 only 200 tonnes of aluminium was produced – equal to the weight of one hundred F-150 pickup trucks with all-aluminium bodies that the Ford Motor Company now manufactures every one and a half hours.

Following the invention of the electrochemical method of aluminium production, the scope of aluminium production and application began expanding almost exponentially.

In the 10 years that followed, from 1890 until 1899, global aluminium production amounted to 28 thousand tonnes. By 1930 it had increased by 10 times – to 270 thousand tonnes, which is equal to the output of today's average aluminium smelter. In the middle of the twentieth century global aluminium production amounted to 1 million tonnes a year, and in 1973 – 10 million tonnes. These trends persisted in the following decades, and in 2014, production volumes exceeded 55 million tonnes. It is expected to amount to 60 million tonnes in 2016.

This rapid increase in the production of the winged metal was brought about by the improvement of production methods, on the one hand, and by the expansion of the scope of application of aluminium, on the other hand. Major structural advances such as industrialisation, urban extension, and technological advances – aluminium came to be an integral part of all these trends. Nowadays, the high rates of aluminium consumption in terms of kilogram per capita are regarded by economists as one of the clear indicators of a robust and well-developed economy. It is little wonder that the leaders in terms of aluminium consumption are those states with a high GDP, including such beacons of technical progress as the USA, Japan and the developed European countries.

The aluminium market consists of the producers of primary aluminium and its alloys – the upstream segment, the producers of aluminium products – the downstream segment and the producers of aluminium out of processed raw material (aluminium recycling).
The upstream segment does not just involve the production of primary aluminium and hundreds of various alloys, but also the whole raw material supply chain preceding this process. To produce aluminium we need to mine bauxite, process it into alumina and deliver it to an aluminium smelter. The world's largest aluminium producers are, as a rule, vertically integrated holding companies comprising bauxite mines and alumina refineries. The advantage of the vertical integration model for large companies is their independence from price fluctuations and many other external factors, as they can ensure the supply of raw materials in required volumes is secured for uninterrupted aluminium production. Small producers, on the other hand, procure raw materials from outside suppliers.

The largest bauxite reserves are concentrated in the tropical and subtropical zones, and so the main production output levels are provided by the countries of Southeast Asia, Latin America and Africa, as well as Australia. As a rule, alumina production facilities are also located in these regions, which makes it possible to export a more complex value-added product.

World's largest aluminium producers

Currently the world's largest producer of primary aluminium is Russian company RUSAL, a company established in 2000. It's assets include facilities for aluminium, alumina and bauxite production located in Russia and Ukraine as well as foreign assets as a result of a number of mergers and acquisitions in the 2000s.
The world's oldest metal producer, also among the TOP-10, is US company Alcoa. It was established on October 1, 1888 by one of the inventors of the aluminium electrolysis technology currently used all around the world, Charles Martin Hall, and was then called the Pittsburgh Reduction Company. In 1907, the name was changed to Aluminum Company of America and it remained until 1999 when it was officially abbreviated to Alcoa.
Another TOP-10 company – Australian-British name Rio Tinto, is one of the world's largest diversified metals and mining companies. In 2007 it purchased for a record USD 38 billion Canadian aluminium company Alcan (Aluminum Company of Canada Limited), thereby becoming one of the global leaders in aluminium production. Along the way, Rio Tinto fended off competition from Alcoa to secure its record acquisition.
Western Europe is represented in the top producer list by Norwegian company Hydro. This company too has over one hundred years' history: it was established in 1905 originally for implementing hydropower projects and has grown to become the largest international energy and metals holding company.
Over the past few years a whole constellation of Chinese companies – Chalco, Hongqiao, Xinfa, East Hope – have stormed into the list of the largest upstream producers, and their share of the market is constantly growing. Today the Chinese aluminium market is the largest in the world in terms of production volume; it has about half of all global volumes. However, over 90% of aluminium production in China runs on the energy generated by coal-powered stations, putting significant pressure on the environment.

The Middle East companies such as EGA (formed from the merger of Dubal and Emal), Alba, Qatar Aluminium, Sohar Aluminium and others are joining the largest market players. All of them have a key advantage: access to cheap power generated by associated gas flaring at the oil fields.

Finally, the Indian companies – Hindalco, Vedanta and others are rapidly increasing their production volumes. India is expected to become a large aluminium exporter to the international market as its capacity growth already exceeds the level of domestic demand.

The downstream-producers in the world number in the thousands. Their products include a vast range of commodities: from semi-finished aluminium products to finished aluminium products.

The largest downstream-producers include North American Novelis and Aleris, British Rexam, European Constellium and SAPA, and many other companies producing aluminium cans, façade materials, parts for airframes and car bodies, packaging materials, pipes, panels, sections and other items on the huge list of popular aluminium products.

More recently, some upstream companies have developed their own downstream operations bringing them additional income. For instance, Alcoa announced it was adopting a policy of changing its business model and that it would no longer be a purely mineral company. Norwegian Hydro, while remaining one of the leaders in primary metal production, is also one of the leading European downstream producers. The world's largest aluminium producer United Company RUSAL has a downstream segment too – the production of all types of aluminium foil for the food, construction and electrical engineering industries.

Every year aluminium production grows in the world as a result of the ever-increasing demand for this metal.

On average, world aluminium demand grows 5-7% annually. For example, the global consumption of primary aluminium in 2014 grew 7% when compared with 2013 – amounting to 54.8 million tonnes. And based on data in 2015, world demand is expected to increase by additional 6% – amounting to 58 million tonnes.

Aluminium production and consumption in the world
The constant upward trend is accounted for by the fact that aluminium is the metal of progress. State-of-the-art developments in the motor industry, construction, electric engineering, aircraft industry and creation of new gadgets all involve the application of aluminium. This metal enables both the engineers and the designers to solve their problems.

At the same time the increase in aluminium consumption takes place against the backdrop of growing global urbanisation and industrialisation. And while the developed countries have reached a high point in their economic development, the developing countries continue to grow aggressively.

The global aluminium market today can be conventionally divided into two parts: China and the rest of the world. During the last decade, China showed remarkable rates of economic growth including becoming the world's largest aluminium producer and consumer.
The People's Republic of China accounts for half of the world's volume of aluminium production and consumption - no other country is anywhere near China on this measure. Furthermore, China satisfies all of its demand for primary metal exclusively with its own production, which is why it is often regarded separately from the rest of the world's volume. At the same time China is actively increasing the export of semi-finished aluminium products competing with Western companies in the global market.

Ranked number two and three in terms of aluminium consumption volume, the European and US markets have demonstrated an all-time level of high demand because of the advanced level of their industrial development. Another large market is Japan, which is not just a developed economy but also the birthplace of a great number of electronics and instrumentation innovations. Furthermore, the Land of the Rising Sun imports all the primary metal it needs, having no aluminium production of its own. The reason is the lack of powerful and cheap power sources in its territory.

The strong growth in demand is constantly demonstrated by the fast-growing countries of Southeast Asia.

The largest volumes of aluminium are used by the transportation and construction industries – in 2014 they accounted for 27% and 25% of consumption respectively. The aluminium alloys are used to make parts of airframes, parts of car and train bodies, parts of fuel systems, conditioning systems, parts of engines, parts of chairs and interior trimming, yachts and sea craft, space shuttles and solid rocket propellants. The fashion of our age demands lightness, speed and reliability, and they can only be guaranteed by aluminium.
Aluminium consumption by industry, thousand tonnes
Aluminium has firmly established itself in the construction area as well: no skyscraper, metal frame building or regular residential house can do without it. Window and door panels, roofing, frameworks, façades and load carrying structures, elements of external decoration, sidings, staircases, conditioning and heating systems – all of these are manufactured today using aluminium and aluminium-base alloys.

Next, in terms of volumes, come the packaging and power generating sectors – constituting 16% and 13% of the market. Aluminium is indispensable in the production of power transmissions and telephone wires, radio locators, condensers, etc. As regards the packaging sector, the top positions belong to foil and aluminium beverage cans. Globally there are 200 billion beverage cans produced a year, and humankind has not invented anything more comfortable and of a better quality than the aluminium foil packaging so far.

Aluminium is an exchange commodity. However, contrary to popular misconception, in most cases this metal is not physically traded on the stock exchange. Over 90% of aluminium sales with physical delivery occur under direct contracts between the metal producers and buyers.

Aluminium is an exchange commodity. Such commodities have standardised consumer attributes – the consumer does not care which specific company produced it. The products are interchangeable, easy to transport and store and can be divided into batches. For this very reason upstream products rather than semi-manufactured or finished goods are traded on the raw exchange markets.

When multi-commodity exchanges were first formed they served as a place for making physical contracts of delivery of such exchange commodities, but as the traded volumes increased and the financial instruments developed, the role of the exchanges changed.

Nowadays futures contracts for raw materials are traded there – financial instruments that almost never result in actual physical delivery (not ruling out this possibility, nevertheless). As a result of this trading activity, a price is fixed which serves as a guide for all producers and consumers throughout the world. The exchange itself does not buy or sell anything, it only provides a trading platform for professional market players - brokers.
There are a few multi-commodity exchanges in the world trading in metals which are located in the area of the greatest demand. In China – it is the Shanghai Futures Exchange (SHFE), in North America – the Chicago Mercantile Exchange (CME). However the world's largest exchange trading in all metals and aluminium in particular is the London Metal Exchange (LME), established as early as 1877.

The LME started trading in aluminium in 1978. More than a century ago when the exchange was starting up, traders would meet in a small coffee shop near the Royal Exchange and make deals orally while gathered in a circle. Nowadays on the LME about 3.7 billion tonnes of various metals are traded annually to the approximate amount of USD 14.5 trillion. This is three times the GDP of Japan.

In June 2012, the Hong Kong Stock Exchange (HKEX) became the new owner of the LME after purchasing it for 1.4 billion pounds.
Aluminium is the world's largest exchange commodity for metals in terms of trading volumes. It accounts for nearly a third of all contracts made on the LME. Over 100 brands of aluminium from the leading producers are traded on the exchange and it serves as a platform serving more than 700 different specialised metal warehouses in 14 countries. This is required so that a buyer can always purchase the metal bought because even though the lion's share of contracts are futures transactions, it is not prohibited for an actual industrial buyer to purchase aluminium for its production needs. This function of the exchange is called the last hope market. In practical terms, it means that a buyer can always purchase and the seller can always sell metal under an exchange-traded contract at an established exchange price and obtain or deliver the commodity to one of the exchange warehouses.

The principal authority in charge of managing this trading activity is the exchange committee. Every day it announces the official day's price for aluminium, which is determined based on the cumulative result of the previous trading session. Trading is conducted in accordance with standard exchange contracts. Each contract specifies the quantity of commodity (for aluminium it is at least 25 tonnes), delivery terms (this could be any warehouse belonging to the London Metal Exchange), the period of performance (immediate delivery, three months, six months, etc.) and quality requirements (metal must be certified by the exchange).

The exchange price established as a result of the trading is the price benchmark for aluminium sellers and buyers all around the world, but this is not the final cost of the metal.

From 1989 until 2015 the average aluminium price on the LME was USD 1,806 per tonne. The record was achieved in July 2008 when the price of a tonne of aluminium came up to USD 3,271. The price hit an all-time low in November 1993. A tonne of aluminium was traded then at USD 1,023.

Today the final aluminium price for consumers is made up, as a rule, of three components: the LME price, regional premium that depends on the availability of the metal in a specific market, and commodity markup depending on the type of commodity. If the price benchmark in global trading activity is based on aluminium quotations on the LME, then whilst negotiating the premium level for actual delivery, producers and consumers take into consideration the information about premiums published in specialised journals such as Platts, Metal Bulletin, Nikkei.

Traders often serve as mediators between metal producers and consumers. They ensure the processing of medium and small orders, assume a part of the financial risks of the transaction, have their own network of warehouses located conveniently for consumers and also render other associated services.

The 2008 Crisis
When the exchanges first appeared, the price established there was considered the fairest in terms of reflecting the actual balance between demand and supply. Yet the global financial crisis of 2008 exposed major deficiencies of the exchange-based pricing mechanism.

The ensuing decline in consumption and industrial production proved to be a serious test for the aluminium industry. The demand for aluminium decreased abruptly, while the price of a tonne of aluminium dropped from USD 3,200 to USD 1,200. The producers had to supply aluminium to LME warehouses as they could not reduce the volumes of metal production fast enough after the decline in demand. As a result, over a few years the volume of metal stored in the LME warehouses grew from 1 to 5 million tonnes.

The financial market players took advantage of the situation: aluminium became for them a financial instrument with guaranteed a return due to the availability of cheap financing and the price contango – a situation where the future price of the metal is higher than the current price. As a result, the volume of aluminium traded on the LME from 2007 until 2014 grew 34 times (+3,300%), while in fact the actual physical demand grew during the same period by no more than 40%.

Financial transactions 'froze' all the aluminium accumulated in the warehouses as each such transaction had to be secured with actual metal. Buyers who wanted to buy aluminium under an exchange contract had to wait for the delivery for a year and a half or more. Waiting lists for delivery began to form. In turn this prompted an increase of premiums for the immediate delivery of the metal – in mid-2014 the amount exceeded 20% of the exchange price of aluminium. Whilst the average amount of premium fluctuated over the past 25 years in the range of USD 60-80 per tonne, that represents about 5%.

The London Metal Exchange attempted to bring the market back into a more balanced state by effecting an internal reform which resulted in the new rules for stocking and releasing metal at the warehouses which significantly limited the possibilities for the financial market players.

At the same time due to the high volumes of aluminium stored in the warehouses the largest aluminium producers cut back a part of their production removing their outdated and unprofitable facilities from operation. In particular, they closed down the facilities operating on coal-generated power which were not complying with the latest carbon dioxide emission standards, which on the whole improved the industry's efficiency and environmental performance.

The western companies, such as RUSAL and Alcoa, were most actively pursuing this course of action, while the producers from China and the Middle East on the contrary continued increasing their production output. The Middle East companies rely on the availability of cheap power from the use of associated gas to have a very low cost of aluminium production and sell the metal at a profit even when the prices are low. As regards China, the top priority there is given to guaranteeing workplaces and maintaining high rates of economic development.

In spite of all these difficulties, aluminium consumption is expected to continue its strong growth. By 2030 the volume of consumption of the winged metal may exceed 80 million tonnes, thus enabling aluminium not only to maintain but rather reinforce its leading position as one of the key structural materials of our time.

Photos from © Shutterstock and © Rusal are used in this article.

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