Worst polluter. Best metal

With a nickname of "congealed electricity", it's hard to imagine aluminium winning a best-of-breed competition against other base metals in a greening world, but that's just what the lightweight metal has done in a competition run by Morgan Stanley.The surprise win, which saw aluminium outrank two green metal darlings, copper and nickel, along with downtrodden zinc, was based on a forecast of tighter supply as much as an increase in demand.Heart of the issue with aluminium, as it is with most metals, is China. Too much metal from Chinese smelters over the past few years has crashed the price from US$3800 a tonne as recently as early last year to around $2240/t.That earlier price was heavily influenced by Russia's invasion of Ukraine and concern that the western world would successfully embargo Moscow's exports in the same way oil and gas bans have been applied with variable success.Power dynamics This time around for aluminium it is largely about trying to limit the production of metal produced using coal or gas-fired electricity while creating a preference for metal made with hydro-electricity, a speciality of producers in Norway and Canada.In a note headlined "Looming Supply Deficit", aluminium was described as a well-supplied commodity, a situation which could change with supply possibly starting to tighten."Morgan Stanley currently has aluminium as its preferred base metal," the bank said."While the energy intensive aluminium production process (from bauxite ore, to refined alumina, to smelted aluminium) is viewed by many as not aligned with global decarbonisation efforts, some companies have made significant progress towards lowering the carbon intensity of their operations.""Indeed, this may present an opportunity for companies that lead in this area, with an opportunity to provide a key metal needed for decarbonisation at a much lower carbon footprint."Companies named by Morgan Stanley as green aluminium leaders are Norsk Hydro, Rio Tinto and South32.China stays zippedOver the past 12-months China has been instrumental in keeping a lid on the aluminium price with output setting records in August and September. That situation should continue into the New Year as previously suspended operations come online. "However, we also believe that constrained power availability in China may create a much tighter market, possibly as soon as the coming (northern) winter," the bank said.Two issues affecting the supply of metal are expected to emerge in China's aluminium industry.The first is the availability of hydroelectricity when dam levels decline, driving shortages and curtailing metal production.The second is the China "production capacity cap", a limit on overall aluminium output imposed several yeads ago, a ceiling which China is now approaching, or might have already reached.The production cap, set in 2017, is an annualised 45Mt a year, but after the record run rates in August and September the annualised output currently stands at 46.5Mt.If China sticks with its plan to cap aluminium production because it is such a heavy user of electricity the limit will be felt around the world, creating an opportunity for the price to move up, reaching $2600/t by 2026, according to Morgan Stanley.Aluminium still important It could go a lot higher as a supply deficit starts to emerge next year, perhaps reaching the peaks of last year because increased supply is being absorbed before China's production issues emerge as a factor in the market.It gets better because aluminium, despite its energy intensity, is an important metal in the decarbonisation drive. "On the demand front, there is a global need for aluminium in decarbonisation, given its use in electric vehicles and renewable power (wind and solar)," Morgan Stanley said."In addition to EVs, other new industries could also support demand, such as 5G, data centres, intelligent manufacturing and smart home appliances."This sets aluminium apart from other commodities that have over-arching demand challenges moving into a decarbonised world."

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