Soaring power costs, lucrative bank deals that keep metal away from the market and strong demand growth will boost aluminium prices this year. Behind the potentially game-changing factors of Middle East regime change and a global rethink of nuclear - that have hit the whole energy sector - aluminium's own electricity costs have been boosted by more regional pressures across the world.
Looming large is an expected power price rise in China, the world's largest producer and consumer of the metal used in transport, construction and packaging. "The cost base for aluminium is very elevated with all these problems in the Middle East and that, together with rising electricity costs in China, mean aluminium will be supported," said Dan Smith, analyst at Standard Chartered.
China accounts for about 40 percent of global aluminium demand, forecast at above 40 million tonnes this year. Beijing is considering its first electricity price increase from generators to grids since 2009, which could start in April and curtail aluminium output as Chinese producers find their profit margins squeezed.
Electricity accounts for about 40 percent of average smelting costs for Chinese aluminium producers, against 30 percent elsewhere. Around 80 percent of China's power comes from burning coal, which it produces and also imports from Australia. Floods in Australia stopped coal exports earlier this year, sending its coal prices to two-year highs.
"Governments are beginning to re-evaluate nuclear plans, certainly the speed of the ramp up of new nuclear facilities and the magnitude of the penetration of nuclear may now be under question," said Gayle Berry, analyst at Barclays Capital. "There is a heightened awareness of the impact the Middle East is having on oil. It's all helping aluminium." Benchmark aluminium on the London Metal Exchange hit $2,656 a tonne this week, double the price seen in February 2009 and a level last seen in September 2008.
"Aluminium has by far the best demand prospects of all the base metals," said Stephen Briggs, analyst at BNP Paribas. "We continue to forecast world demand growth of 8-9 percent in both 2011 and 2012, with aluminium benefiting from substitution away from copper in particular." One effect of higher smelting costs is that the premium for London Metal Exchange contracts with longer maturities against the cash contract has jumped.
For example the price of the LME's December 2012 contract is now around $140 a tonne above the cash contract. At the start of February the difference was $90 a tonne.
This makes financing deals, which currently tie up about 70 percent of record high LME aluminium stocks at around 4.6 million tonnes, more profitable and so more likely to be renewed, keeping upward pressure on aluminium prices. A typical deal consists of banks buying nearby aluminium from a producer, selling it forward at a profit and striking a warehouse deal to store it cheaply for an extended time period.