Aluminum production is energy intensive — electricity accounts for roughly 40% of production costs — which means the aluminum price is fundamentally linked to energy prices and the cost of power in producing regions simultaneously. China accounts for more than half of global aluminum production, and Chinese government policy on smelting capacity — whether they are curtailing production for environmental reasons or allowing expansions — is the most important single variable for global aluminum supply. The metal has attractive structural demand characteristics: it is lighter than steel, corrosion resistant and infinitely recyclable, making it the material of choice for automotive lightweighting, EV battery enclosures, aerospace applications and premium packaging. Each percentage point increase in EV penetration represents incremental aluminum demand since EVs use significantly more aluminum than combustion engine vehicles. Secondary aluminum production from recycled scrap uses roughly 5% of the energy of primary smelting, which gives recycled aluminum producers a structural cost advantage when energy prices are high. For investors, aluminum company profitability is a function of the spread between LME prices and regional production costs — companies with captive hydropower or low-cost power contracts generate dramatically better through-cycle returns than those exposed to spot electricity prices.
