Material Matters: Bauxite, Alumina And Aluminium

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-Cost push underpins alumina production
-Lower power prices in China help
-High premiums at play in aluminium
 

By Eva Brocklehurst

Alumina prices have risen sharply since July and now boast the highest levels since September 2011. Pricing is supported by a cost push in China's coastal alumina production, the world's marginal producing region, as bauxite prices surge on the back of the mineral ore export ban enacted by Indonesia at the beginning of this year. Around 18-24 months of bauxite was stockpiled in March, Commonwealth Bank analysts observe, and this is expected to last until the end of the year.

Alumina refineries will then need to rely on high-priced seaborne bauxite to meet requirements by the end of this year and into the first half of 2015. This means the alumina market, already showing signs of tightness, will tighten further. August data shows the alumina required to supply China's aluminium sector was higher than alumina production for the first time in four months.

JP Morgan also calculates that a further drawing down of bauxite inventory occurred in August, but believes China's bauxite costs are yet to tighten in response to the Indonesian export ban, which may suggest the "cost push" story for alumina could be less dramatic and take longer to play out. Lower electricity prices are also helping in some regions of China to offset higher bauxite input costs. Input costs for alumina are typically weighted more to energy than to the raw material, bauxite.

Bauxite imports were still short of seaborne consumption requirements for Chinese alumina refineries and JP Morgan estimates current bauxite inventory stands between eight months to one year's worth of import requirements. Import prices by country were relatively steady in August but the broker notes a larger composition of higher cost suppliers. Australia remains the primary supplier at 62% of China's imports. The nature of Rio Tinto's ((RIO)) bauxite contracts is not known but it appears they are relatively long dated, given prices are not rising materially and Rio Tinto is now the main supplier. JP Morgan expects a drive for higher prices as the contracts roll off.

Moving further up the refining scale and high premiums are inducing more Chinese aluminium supply. When combined with the current spot price almost all the high cost Chinese producers are cash flow positive, ANZ analysts observe. Despite this, they believe aluminium supply will struggle to meet the growth in demand, as world usage increases with the focus on reducing weight and improving energy efficiency in the transport industry. The global transport sector accounts for 25% of the world's aluminium consumption. Lower growth in production has forced consumers of aluminium to dip into London Metal Exchange inventories at an increasing rate and the analysts note available inventory has been falling consistently since 2012.

As Chinese demand slows, exports are increasing and the analysts believe this situation will continue, as the lure of high premiums and more power subsidies induce more smelters in China to re-start. China turned around to become a net exporter of aluminium in 2012 and in July 2014 exports breached 400,000 tonnes for only the second time in history.

JP Morgan also remains constructive regarding the aluminium price and premiums, noting the general consensus at the aluminium conference in Abu Dhabi was for capacity re-starts in the near future to be only on a small scale. China is expected to re-start around one million metric tonnes of capacity by the end of 2014 while idled European capacity also has a high probability of re-starting. Curtailed Brazilian capacity is not expected to re-start until at least 2016 or 2017 because of the high relative cost of electricity. On the demand side, the US automotive sector has been strong relative to expectations and overall demand is expected to remain elevated. In Europe weaker demand from building and construction is being offset by the automotive sector.
 

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