04 October 2018
Aluminium is expected to go through a period of solid price growth and, for the first time in two decades, China's role in the aluminium story may change.
Growing concerns of a trade war between the US and China caused aluminium prices to fall from $US2,644 a tonne in April 2018 to around $US2,000 four months later.
But Macquarie's Head of Commodities Strategy, Tom Price, says the outlook is positive, even as long-standing aluminium heavyweight, China, becomes less reliant on the metal for its economic growth.
Aluminium has played a significant role in China's changing economic fortunes.
“Aluminium smelters were at the centre of China's economic planning - as China's economy grew so did the importance of aluminium," says Price. "You can actually track the evolution of the country's economy via this particular commodity."
China produces around half the world's aluminium supply and consumes most of its own output.
Primary aluminium production in China for 2018 is annualising at 33.4Mt (based on January to August), up 4% year-on-year. China’s corresponding consumption rate is almost 35Mt, outstripping domestic supply, prompting a drawdown in domestic metal inventories.
But as China's economy transitions from manufacturing and exporting to services and domestic consumption, aluminium will becomes less vital to its success.
Pollution concerns around the aluminium production process are also a factor in China's desire to close down smelters and cut excess supply.
Price doesn't expect China's shifting economic focus to dull aluminium's global appeal.
The metal remains a key component in many products including motor vehicles, machinery, electrical goods and packaging, so it will still be needed in large quantities.
For example, the world's largest aluminium producer - China Hongqiao Group - now makes aluminium in Indonesia and Africa. China’s other aluminium giant, Chalco, has operations in Peru.
“The materials-intensive growth path that China took is probably still the least risky path to industrialisation for emerging economies," says Price.
"China is now engaging other countries, investing directly in their industrial bases and urbanization growth stories, in much the same way Britain did in Victorian times and the US did across Asia and the Americas after the Second World War."
By taking on this role as a type of global industrial ‘consultant’, developing operations elsewhere, China's aluminium producers may be able to avoid the worst fallout of any trade war with the US. However, Price believes that even if the trade war intensifies it poses no long-term threat to the aluminium outlook.
“The US is an important consumer of aluminium and doesn't have the capacity to meet its own demand," he says. "It needs to get aluminium from somewhere."