Aluminium’s Climate Paradox

Published on13 AUG 2021

The article below is from our BRIEFINGS newsletter of 13 August 2021


Attempts to move the global economy toward net zero carbon emissions over the next decade will continue to raise the prices of commodities—particularly those needed to develop low-carbon technologies. Aluminium is no exception, yet it poses a unique paradox: It is a necessary element of technologies like electric vehicles and solar panels, but its production generates a lot of carbon—2% of all global emissions. We sat down with Goldman Sachs Research’s Nick Snowdon to hear his view of why aluminium prices are going to keep rising over the next five years.

Nick, can you walk us through your argument that aluminium’s status as both a cause of climate change and a part of the solution will result in higher prices?

Nick Snowdon: We’ll need to procure enough aluminium to continue developing technologies that decarbonize our economies while keeping the toll on the climate to a minimum. We think this will result in significant cost inflation for the metal. Higher aluminium prices will be required to incentivize smelters to invest in cleaner methods of production against the backdrop of rising demand and slowing supply growth. In fact, green demand for the metal is rising just as supply growth is set for a sharp decline in the first half of this decade. Investment in additional aluminium capacity outside of China has been largely curtailed amid stricter climate-related policies.

Where is aluminium used in clean tech?

Nick Snowdon: A large chunk of the demand comes from the electric vehicles industry. We predict EV-related demand to grow at a rate of 20% per year for the remainder of the decade. An EV contains on average 250 kilograms of aluminium, 70 kilograms more than a vehicle with an internal combustion engine. The lightweight, recyclable metal is used in a number of components, ranging from EV-specific parts like battery casings and the electric motor housings to more traditional car parts like wheels and brakes. Aluminium is also used in the majority of components making up solar panels, as well as in the towers of wind turbines.

What role will policymakers play in facilitating this demand?

Nick Snowdon: Over the past six months, economies making up almost 70% of global GDP have outlined policies to strengthen their commitment to curbing climate change, from China’s 2060 net zero pledge to Europe’s carbon border tax proposal. The momentum is there. Policymakers must make it more cost-effective for producers to switch to production methods that are more environmentally friendly. One strategy, currently underway in China, is to place caps on coal-powered production and thus create a scarcity to be filled by green producers. Another is to force producers to pay the cost of carbon emissions through policies like a carbon tax, ultimately making pollutive production uncompetitive. The latter is underway in Europe and we think will be the dominant strategy going forward.

What are your projections for aluminium prices over the next few years?

Nick Snowdon: We recently upgraded our forecasts and now project aluminium to average $2,450/ton in 2021, $2,900/ton in 2022 and $3,250/ton in 2023 before levelling off at $3,500/ton in 2025. We believe the metal is in the early stages of a multiyear bull market.

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