Now that we know all about aluminum cans themselves per the last installment in the deep dive blog series, a few other questions have come to be top of mind regarding the raw material that goes into their production: aluminum. What is aluminum used for in the United States? Where does it come from? What determines its price? How has this changed over time? I’m glad you’ve asked, because today is the day that all of your questions will be answered!
Price Determinants
Two principal processes of producing aluminum exist: primary production secondary production. Primary production involves refining bauxite, a sedimentary rock with high aluminum content, into aluminum itself. Secondary production involves producing aluminum from recycled materials. As with all goods, the primary determinants of the price of aluminum are supply and demand. With aluminum, the primary indicator of demand is the overall state of the economy as aluminum use is closely tied to the production of raw materials or goods[1]. As such, the of aluminum if loosely tied to the economy. When the economy is strong (represented, for this purpose, by the S&P 500), the price of aluminum generally rises. However, when there is an economic downturn, the price of aluminum typically decreases.
However, one may note that the price of aluminum has stayed relatively consistent over the past 30 years whereas the economy has shown continual growth. This is due, in part, to the increase in production of secondary aluminum. As recycling technologies and awareness have increased over time, the amount of aluminum produced from secondary production has also increased substantially, keeping the price of aluminum low. Furthermore, more advanced processes for mining and refining bauxite, have also contributed to this relatively consistent price.
U.S. Consumption and Production
Within the United States, consumption of aluminum has been growing steadily over the past decade. Due to its light weight, aluminum has been incorporated more and more into the building and transportation industries. Over the past 6 years alone, consumption of aluminum in the United States has increased by 32%[2]. Breakdown of use in the United States is represented in the following table[3]:
However, while use has been constantly increasing, U.S. production of aluminum has not followed suit. Primary production of aluminum, in which roughly 40% of the cost of the aluminum is due to energy input, has decreased steadily within the United States due to high energy costs. Secondary production, however, has remained constant as it uses only 6% of the energy required for primary production. As a whole, the U.S. meets 13% of its aluminum needs through primary production, 27% through secondary production, and imports the remaining 60%[2].
Due to the large quantity of aluminum being imported, foreign policy plays a substantial role in the cost of aluminum within the United States. In March of 2018, a 10% tariff on aluminum was implemented[2]. While this did have a significant impact on the cost of aluminum domestically, both Canada and Mexico, who supply 39% of imported aluminum, were excluded from the tariff[4], thus limiting the extent of its impact.
Aluminum, like all commodities, lives in a complex ecosystem both at the national and international level. While a direct 1:1 relationship between any given variable and the price of aluminum will never be able to be established, the overall state of the economy, the supply of raw materials – scrap aluminum and bauxite – the cost of energy, and foreign policy are all key factors that can provide insight into the current and future state of aluminum.
Cheers,
The Consultant