Aluminium prices have likely bottomed out and should rise over the medium term, supported by two structural drivers: limited smelter capacity additions and uptick in demand.

Prices have plunged ~45% from the March 2022 peak to around $2,400 per tonne now, driven by Chinese lockdowns and easing supply concerns. This followed a stupendous rally over the past two years, driven by strong global economic recovery after Covid-19 abated, and concerns about supply from China and Europe.

Despite the correction, prices are 40-45% higher than the average of $1,925 seen between 2010 and 2021.

Limited capacity additions over the next five years will be key to the rebound in aluminium prices. Pertinently, China, which added over 16 million tonne (MT) of capacity over the past decade, is likely to take a pause to reduce emissions. Aluminium smelting is highly energy-intensive, requiring 13,500-15,000 kWh per tonne.

Due to its large proportion of coal-fired smelters, China’s carbon emission intensity is higher at 11-13 tonne of carbon dioxide per tonne of aluminium, compared with 4-10 tonne for the gas-powered smelters of Europe. Hence, China has not only capped aluminium smelting capacity at 45 MT per annum but is shifting primary aluminium capacities to hydropower-rich regions in its south-east.

On the other hand, demand for aluminium is expected to see a structural growth over the medium term driven by global green investments such as for electric vehicles, solar panels and renewable energy grids, most of which have high aluminium intensity.

Says Hetal Gandhi, Director, CRISIL Research, “Green investments across major economies will lead to a strong uptick in demand for aluminium, but global capacity addition is expected to fall from ~20 MT during the past decade to just 3-4 MT over the next five years. The robust demand growth, rationalised supply addition and healthy utilisation levels point to multi-year deficits of 0.5-1.2 MTPA in the global primary aluminium market post 2023.”

Domestic smelters have also expanded aggressively over the past decade, adding over ~2.4 MT of capacity, registering an annualised growth of 9% till fiscal 2022.

However, domestic demand has seen slower growth of ~4% during the period, driven by power sector capex and cable conductor exports, with the excess produce finding its way into export markets. India exports 58-62% of its primary aluminium production.

Says Koustav Mazumdar, Associate Director, CRISIL Research, “Despite the large share of exports, domestic primary aluminium manufacturers are expected to add only ~1.4 MT of smelting capacity, goaded by the looming global deficit. Investments in upstream alumina expansions to add over 6.4 MT of refinery capacity will lead to better cost control translating into higher profits. All these capacity expansions over the next five fiscals will cost ~Rs 45,000 crore.”

Domestic alumina requirement, currently at 8-9 MT, is expected to rise over 11 MT by fiscal 2027 driven by smelter expansion. On the other hand, production is at 7-8 MT (Vedanta imports over 50% of its alumina requirement). This is likely to change with investments in upstream alumina refineries taking capacity to 14-14.5 MT by fiscal 2027. Moreover, a new entrant has announced setting up of a 4-MTPA alumina refinery in Odisha, which will add to the surplus in the long run.

With domestic supply outgrowing demand, domestic smelters will continue to export nearly 60% of their output over the next five fiscals.