"Aluminum to Outperform Copper Next Year, Could Set New All-Time High"

[Financial News] Aluminum prices next year could outperform copper as substitution demand driven by rising copper prices coincides with China's supply restrictions and higher energy costs. One analysis estimates that about 2.5 tons of aluminum are needed to replace 1 ton of copper. Daishin Securities forecast that, given this exchange ratio, the price of 2.5 tons of aluminum could rise to 85%–90% of the price of 1 ton of copper.

In a report published on the 26th, Daishin Securities analyst Choi Jin-young identified substitution demand driven by rising copper prices, China's production-capacity limits, and the possibility of higher fossil-fuel prices as factors supporting aluminum's strength.
Choi said, "Amid tightening supply and demand, aluminum prices next year are expected to outperform copper and set a new all-time high due to the delayed emergence of an 'energy supercycle.'"
In particular, rising copper prices are expected to stimulate demand for aluminum. According to the report, applications that do not require high-purity copper, such as home appliances, electronic devices, and construction materials, account for about 65% of total demand. Aluminum can replace copper in these sectors.
Applying the exchange ratio of about 2.5 tons of aluminum for every 1 ton of copper, the report estimates that aluminum prices could rise through substitution demand to 85%–90% of copper prices.
On the supply side, production controls in China, the world's largest producer, are expected to support prices. Through its "Implementation Plan for High-Quality Growth in Aluminum," China is tightening requirements for capacity expansions in alumina and electrolytic aluminum while promoting the expansion of recycled aluminum.
The report set the electricity input requirement for electrolytic aluminum at 13,000 kilowatt-hours (kWh) per ton and interpreted this as a factor behind China's aluminum production capacity remaining in the range of 45 million tons.


Changes to China's export tax policy were also cited as a factor constraining supply. Daishin Securities noted that China had abolished export tax rebates for electrolytic aluminum and processed aluminum products, viewing the move as a measure to encourage production cuts.
In the short-term supply-and-demand balance, declining inventories are supporting the price floor. According to Samsung Futures, aluminum inventories in China's three major regions stood at 542,500 tons on the 22nd, down 11,500 tons from the previous tally. Inventories on the Shanghai Futures Exchange (SHFE) also fell by 8,732 tons in a single day and by 104,800 tons over the past month.
However, China's high output is a factor limiting price gains. Samsung Futures said that declining inventories in China are supporting the downside in the aluminum market, while high production is capping the upside. It forecast that supply pressures could come to the fore if inventories begin rising again after the Chinese holidays.
Electricity prices were identified as a key cost variable. The report analyzed that electricity accounts for more than 40% of aluminum production costs, a larger share than bauxite, the raw material, making aluminum prices sensitive to changes in fossil-fuel prices such as natural gas and fuel coal.
It also assessed that energy and aluminum prices could rise together if the weather factors currently limiting increases in fossil-fuel prices weaken next year. However, this is a conditional outlook based on the correlation between weather forecasts and energy prices.
Choi forecast, "If supply constraints and rising energy prices occur at the same time, aluminum prices next year could outperform copper and set a new all-time high."
[email protected] Kim Mi-hee Reporter