Will spiralling aluminium costs drive Apple’s prices up?

Apple worked with US smelters to improve aluminium production process

Yet more supply chain problems as aluminum costs are spiralling in response to the extended COVID-related crisis which continues to impact across the supply chain and growing energy shortages. The metal, widely used across all Apple’s products, is currently trading at a 13-year high as soaring production and electricity costs bite. Will Apple’s product prices climb in response?

Demand is increasing while supply shrinks

Aluminium prices have soared since hitting pandemic-era lows of around $1,440 in April 2020. They are now up c. 40%. Analysts at Goldman Sachs and Citigroup last month raised their predicted price on the metal citing reduced output from China, the world’s largest producer. Alcoa, the biggest US aluminum producer predicts demand for the metal will climb this year.

The thing is, demand hasn’t gone away. The drive (sorry) to manufacture electric cars is raising demand for the metal as they usually use more aluminium than conventional vehicles, which also serves to raise costs. The metal is also used in everything, from drinks cans to processors, computers and more.

Aluminium is a fantastic metal for product design. It’s also called “congealed electricity”, because of the huge quantity of electricity its production requires.

Apple’s congealed electricity

The second most-used metal in the world, the consequential impact of aluminium production is the production of greenhouse gases through the burning of carbon. It takes 14 megawatt hours (MWh) of power to produce one tonne of aluminium.

Apple has put a great deal of effort into working with the metal, which you’ll find across all its products. It has developed cutting-edge processes to produce colored aluminium, and worked with Alcoa and Rio Tinto to develop a carbon-free smelting process under the Elysis brand.

Apple began purchasing metal from Elysis in 2019. The metal now used in the 16-inch MacBook Pro, according to Apple’s environmental responsibility report. It’s presumably inside new Macs, too, but I’m not certain of that.

“We are proud to be part of this ambitious new project and look forward to one day being able to use aluminium produced without direct greenhouse gas emissions in the manufacturing of our products,” said CEO, Tim Cook, at that time.

Apple has begun using recycled and hydro-smelted aluminum in its products, which means carbon emissions associated with aluminum for Apple products has decreased 72 percent since 2015,according to its own reporting.

Apple has some way to go until its entire supply chain is carbon neutral.

iPhone environment slide as used during iPhone 13 launch

More problems in China

China is making a very serious attempt to reduce pollution. Part of this effort has seen production of metals including steel and aluminium, another has been introduction of constrained energy supply.  Gregory Shearer of JPMorgan Chase told The Economist that limited power supply could reduce aluminium output by up to 5 percent.

What will Apple do?

Apple tends to buy what it thinks it needs in advance and may well have stockpiled vast quantities of the metal when it was cheaper during the first wave of the ongoing pandemic, which will give it some wriggle room.

However, moving forward, with no end in sight on pandemic-related supply chain stress; climate change targets and growing demand for the metal, I wouldn’t be too surprised to see margins impacted.

Apple has some protection even here, of course – its move to adopt its own processors inside of its products almost certainly means it is paying much less per chip than it did when using Intel. This will give it an opportunity to absorb some of the component costs, at least in the short-term.

Apple is aware of these conditions, I think.

While focus in recent months has been on chip supply shortages, the company was a little less specific when CEO Tim Cook warned during its fiscal call: “In terms of supply constraints and how long they will last, I don’t want to predict that today. We’re going to take it sort of one quarter at a time.”

We may learn a little more concerning the impact of aluminum costs on the company during the upcoming financial call October 28. But the first big news for most in the Apple community will be the introduction of new Macs at the company’s special event tonight. Though perhaps bigger news isn’t terribly far behind…

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