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A time to grow

Mar 01, 2018 | 06:00 AM |

Alumina and bauxite producers are ramping up production as high prices encourage expansions. But the foundation of it all is a Chinese industry that is shrinking under environmental restrictions, reports Jethro Wookey

Aluminium’s upstream markets have become used to taking their cues from China, as the often obscure priorities of that nation’s economic policy determine the operational status of millions of tonnes in annual smelting capacity and thus its demand for the light metal’s constituent materials. In 2017, China’s stance against further environmental degradation was hardened and sweeping cuts were ordered to older, high-polluting aluminium smelters in the middle of the year. The scheduled winter capacity cuts, which could total up to 3 million tpy alone by the end of the first quarter of 2018, are adding to that volume.

The Chinese focus on lower-efficiency facilities has encompassed its alumina refining and bauxite mining industries too, which has hit China’s importing strategy as well as thrown the future global balance of those industries into doubt.

Prices have responded. The three-month LME daily official price reached a five-year high in November 2017 at almost $2,200 per tonne, which it then topped at the very start of this year when it reached nearly $2,270 per tonne. Producers expect prices to at least maintain such levels in 2018 on strong demand.

“We maintain the view of a balanced market outlook for primary aluminium, with a 2018 global demand growth outlook of 4-5%, driven by solid demand for aluminium from automotive and construction markets,” Norsk Hydro ceo Svein Richard Brandtzæg said in February.Premiums also rose throughout the second half of last year and – in their wake – so too did bauxite and alumina prices.

Metal Bulletin’s fob Australia alumina index reached a record high of $479.40 per tonne in late October last year, which was well above its previous high of about $418 per tonne in April 2011, as a wave of buying by traders and smelters followed shutdowns of Chinese alumina production. Bauxite prices have also risen. Metal Bulletin’s fob Trombetas, Brazil, bauxite price indication has risen to $37.50 per tonne at the time of writing from $32.25 per tonne in May, with the fob Kamsar, Guinea, price following at similar levels.

Alumina prices have since fallen back to around $385 per tonne, on thin buying over year-end as some buyers reportedly baulked at prices when compared with primary metal levels. But both aluminium prices and premiums were, and remain, significantly lower since alumina reached its record high in October than they were when it hit its previous high in 2011. As a percentage of primary aluminium prices, alumina prices could go higher still if there exists a long-term threat to production capacity.

That is the case now in China. Many of the cuts are surely part of the winter closures and will be reversed, likely sometime in the second quarter. Estimates for winter capacity cuts to Chinese alumina production range between 1 million and 1.5 million tpy.

“Closures of capacity in steel and aluminium over the past two years have been significant. Enforced winter cuts in steel and aluminium have started, but how much actually takes place is still uncertain,” Jim Lennon, managing director of Red Door Research Ltd, said recently.

The question is how big the permanent cuts to alumina production capacity in China will be and how these and the concurrent cuts to primary smelting capacity will leave the demand/supply balance for the aluminium value chain in China – and its import policy as a result.

China’s imports
China imported 68.55 million tonnes of bauxite in 2017 – almost a third higher than in 2016, according to Chinese customs data, after demand spiked following bauxite supply disruptions in Henan and Shanxi provinces. Guinea was chiefly responsible for the increase, with Chinese imports from that nation totalling 27.63 million tonnes in 2017, up by 132.35% from the previous year after large investments made by Chinese companies in the African country to secure stable seaborne bauxite supply over the past few years. Australia sent 25.48 million tonnes of bauxite to China in 2017, up by 19.6% from 2016.

Chinese alumina imports fell in the latter part of 2017. China took in 631,535 tonnes of alumina in the fourth quarter last year, down from 847,026 tonnes in the previous quarter. Chinese customs data also showed full-year imports were down by 5.31% to 2.87 million tonnes in 2017. The closure of the import arbitrage window in early 2017 saw Chinese buying interest for seaborne alumina slip for much of last year, with large year-on-year declines in Australia-origin material reported in July. The market saw tight availability of Australian alumina as major suppliers claimed to have sold out of nearby Australian cargoes, and total shipments from Australia to China fell to 195,889 tonnes in the second quarter of last year, down 44.64% from the same period in 2016.

Others picked up the slack. Shipments of alumina to China from India reached 34,428 tonnes in the June quarter, up more than 10%, while Indonesia delivered a total of 131,001 tonnes, growing from almost nothing as its nascent alumina industry has now started business. Recently Chinese alumina buying has dipped from these and other regions too on the aforementioned price concerns.

Overall then, with falling alumina imports and cuts to Chinese alumina refining capacity, stocks in China are likely low, and thus it would appear to be a good time coming for alumina producers. Many are preparing for just that.

India is aggressively expanding its alumina output (see box), with Nalco announcing in January that it had produced a record 2.1 million tonnes of alumina in the 2016/2017 fiscal year, up 7.53% on the previous year. The country is also seeking approval for new bauxite mining leases to feed its planned one million tpy refinery in Damanjodi. Hindalco is also planning large investments to boost its capacities to alumina refining and is seeking government approval to double output at its Utkal alumina refinery to 3 million tpy.

Other regions are also looking to boost their alumina output, particularly in light of foreseen Chinese demand and often on the back of Chinese investment. China’s Jiuquan Iron and Steel Group Co (Jisco) said recently that its first alumina cargo from the Alpart plant in Jamaica, of 34,200 tonnes, had arrived at the Chinese port of Lianyungang. Jisco acquired the 1.6 million tpy refinery from UC Rusal.

Others are looking to do the same with their bauxite capacity, betting that China’s demand will climb in coming years, and implying that perhaps they do not think that the cuts to Chinese alumina refining capacity will be widespread or long-lasting.

Guinea is now the biggest supplier of bauxite into China, following heavy Chinese investment in the region, and it will be expanding that trade in 2018. Already this year, Guinean bauxite mining company La Guineenne des Mines (GDM) has delivered the first shipment from its 40 million-tonne resource in West Boke. The purchasing rights are owned by China’s Shadong Weiqiao.

Indonesia has now restarted bauxite shipments to China after four years under the country’s raw material export ban’s restrictions. More than 10 million tonnes in export quotas have been granted to qualifying companies, and among the first to receive one was PT Aneka Tambang, which increased its bauxite production in 2017 by 192% in anticipation of supplying Chinese buyers. Indonesia may try to re-establish its position as dominant exporter to China, but the recent uncertainty of Indonesian supply due to the export ban and the investment by Chinese companies into North Africa and other regions may prevent it from succeeding.

Elsewhere, Rio Tinto’s $1.9 billion investment in its Amrun bauxite deposit in Queensland, Australia, is due for completion in the first half of 2019, and will support further expansions in the future. Nalco’s bauxite production reached 6.83 million tonnes in the 2016/2017 fiscal year, up 7.65% year-on-year, and that figure will grow if it is granted the leases it seeks.

Risks implied
So bauxite companies are increasing their output. Alumina companies are increasing their output. Integrated aluminium companies are increasing their bauxite and alumina output. Recent price trends are encouraging them all.

But market balance depends mostly on China – a country that is reducing its output of everything and with nothing to suggest that it will be changing course any time soon.

It may not matter if prices remain high, pulled up by high aluminium prices if the larger part of the Chinese cuts is to the smelting industry. Current bauxite and alumina prices are prompting expansions now and if aluminium prices increase further on potential shortages then alumina and bauxite prices may keep following – particularly considering that alumina prices have, on occasion, been a greater portion of the overall aluminium price than they are today. This will encourage further expansions in aluminium raw material capacity.

“Some Chinese refineries will close, and maybe there will be some restarts elsewhere as prices are firmer. But there will not be significant new [Chinese] capacity, and I doubt there will be new refinery construction due to [environmental] issues,” UC Rusal ceo Vladislav Soloviev told Metal Bulletin in an interview late last year.
Nevertheless, even if the cuts are mostly to primary metal production, they will feed through to the raw material markets, with demand and prices falling in turn. And there is not a lot of room on the downside for the alumina market in particular, with the raw material prices for alumina production increasing in 2017.

China’s industrial capacity cuts in line with its environmentally conscious stance have led to higher prices for the caustic soda used in the alumina refining process, while the carbon anodes used in aluminium smelting have also become more expensive on lower Chinese production.

All this means that the potential profitability of a lot of current and planned alumina capacity relies on high prices that are vulnerable to Chinese aluminium smelting cuts, while planned bauxite deals are likewise exposed to swingeing cuts to alumina capacity that last beyond the winter heating season.

Those best equipped to succeed in the uncertain environment are the integrated producers. The likes of Nalco and Norsk Hydro, which saw its earnings increase on higher aluminium and alumina prices in the final quarter of 2017 but admitted that higher raw material prices for both units tempered results, and Chalco in China can adjust their product mix between the raw material and primary metal products based on prices, but others are less flexible. With both bauxite and alumina producers betting on strong demand from a Chinese economy that is steadily decreasing its primary metal output, there is a lot of exposure to potential price falls due to those cuts in 2018.

By: Jethro Wookey