February 15, 2023

Norwegian aluminum producer Norsk Hydro thinks that aluminum demand will increase due to improving macroeconomic conditions. As for supply, they believe that recently shuttered aluminum smelters will remain closed despite increasing aluminum prices and falling energy costs. AEGIS notes that both factors could remain supportive of prices, especially if demand increases more than expected, or supply continues to fall. Norsk Hydro essentially said as much, stating that another 600,000 tons of production capacity could be curtailed if European energy prices rise again. In a recent interview on Bloomberg TV, Norsk Hydro’s CFO proclaimed “smelters in Europe that don’t have long-term power contracts, the situation still looks challenging… We haven’t seen a lot of restarts apart from the state-subsidized ones.”

Extrapolating on Norsk Hydro’s comments regarding production, AEGIS notes that only one European aluminum smelter, Aluminum Dunkerque, has announced a ramp up in production after a previous curtailment. Echoing Norsk Hydro’s comments on subsidies, we note that Aluminum Dunkerque buys most of its power through a French nuclear-power program known as ARENH, with the remainder of its power needs is purchased at market prices. Moreover, approximately 1.16 million mt/yr, or 26% of Europe’s annual smelter capacity, remains offline due to poor demand or high electricity prices, based on AEGIS estimates.

LME aluminum prices fell throughout most of 2022 as falling global demand outweighed supply concerns. However, prices have rallied so far in 2023, mainly because many market participants believe Chinese demand will increase this year. As both AEGIS and Norsk Hydro suggest, prices could rally further, especially if other regions see an uptick in aluminum demand. Aluminum end-users that are bullish on price can hedge this price risk via swaps or call options. Such positions are standard for consumer hedging; however, they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. (2/15/2023)   

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Price Indications

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