Is Aluminium Pivoting Towards A Structural Bull Market?

Commodities | Sep 14 2021

While demand for aluminium is on a tear due to disruption and power-related restrictions, there’s growing concern that a breakdown in the supply of bauxite from Guinea could lead to a deficit

-Jury’s out on whether bauxite supply can sustain Guinea’s military coup
-ANZ sees the global aluminum market recording a major deficit in 2021
-Citi’s base-case is for cash aluminum price to repeat all-time highs of mid-2008

By Mark Story

A string of Chinese supply challenges together with a constrained physical market beyond China, plus rising energy prices, have culminated in the London Metals Exchange (LME) cash aluminum prices hitting ten-year highs of US$2,777/t on September 9th, after rallying 40% from the start of 2021.

While the strong price rally over the past year, broadly in line with the global cyclical upswing, would typically unwind owing to a supply response, Citi believes the constraint in aluminum supply is sufficient to sustain higher prices for years to come.

ANZ Research estimates that over 1m tonnes of aluminium smelting capacity were curtailed in second quarter FY21 due to China’s aluminum smelters being hampered by power restrictions. However, ANZ notes the bigger impact on output is yet to come, with plans for new capacity in Yunnan now expected to come online more slowly than originally forecast.

Beyond China, other supply issues include structural damage to one of Alcoa’s ship unloaders at its Alumar refinery in Brazil which is forcing a reduction in alumina output to about 7,000 t/day. Then there’s Jamalco, an alumina plant located in Jamaica operated by Noble Group, which sustained damage in a major fire on 23 August.

Guinea Uncertainty

Political unrest in Guinea has also significantly heightened the risk of disruption to the output of bauxite, the key feedstock in the production of aluminium. However, Citi has not identified any firm impact on Guinea’s bauxite exports, given that the leader of the military coup has urged miners to operate as usual and suggested he will honour existing mining agreements and re-open ports.

However, ANZ Research notes that while Guinea’s pipeline of bauxite-related projects is solid - with the potential to expand output by at least 50% over the next three to five years – the risk of disruption to future supply is thought to be high. ANZ reminds investors that Guinea supplies China – the world’s largest aluminium producer -- with nearly half of its bauxite imports.

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