Alumina and bauxite: a story of supply

With healthy demand and supplies at all points of the value chain, aluminium prices are set to remain low for the foreseeable future. Industry analysts at CRU and Wood Mackenzie lend their insight into the outlook for this industrial commodity.


bauxite mine

The aluminium market has always been a supply rather than a demand industry and it's no different today. Its production involves extracting alumina from the raw material bauxite, then smelting it to make pure aluminium. While capacity of alumina is to ramp-up hugely over the next ten years, the industry's main source of bauxite has been replaced almost overnight, which may happen again in the not too distant future. Demand is, and is predicted to stay, strong, therefore prices for primary aluminium will remain low; something that's unlikely to change in any significant way moving forward.

Aluminium prices hit a six-year low of $1,465.50 per tonne in late October and haven't recovered much since (currently, they are around $1,600 per tonne), with traders worried about the likelihood of large surpluses this year and next, and the lack of substantial output cuts to balance the market.

"Excess production from new projects in China [the main global player in the aluminium market, representing 40% of supply and 60% of demand] is adding to the global inventory overhang," explains Eoin Dinsmore, editor of global commodity and industry pricing and market analysis company CRU's Aluminium Market Outlook. "Despite weak prices, low-cost Chinese smelting projects continue to come on stream, while closures of high-cost capacity are not being delivered in sufficient quantities," he says, adding that there is potential for the price to fall further.

"The aluminium market remains in structural oversupply with Shandong, Xinjiang and Inner Mongolia emerging as the new production hubs. The LME aluminium price will drop to average $1,500/t in 2016 to deliver the closures necessary to halt an excessive inventory build. CRU believes this price will be low enough to deliver closures and we see $1,400/t as the floor."

Alumina in good health

When it comes to alumina, specific global capacity forecasts may vary but there's one thing that's certain; production will boom over the next decade.

"Alumina demand growth has always been very healthy and CRU forecasts it to stay healthy."

Indeed, CRU's July 2015 long-term market outlook for bauxite and alumina estimates global alumina capacity to grow by 29.6%, reaching 179.6 million tonnes by 2024. Metallurgical-grade alumina capacity expansion, primarily in China, is expected to be the main driver for this growth.

"In absolute terms, alumina supply grows faster than aluminium supply because you need between 1.93 and 1.97 units of alumina for each unit of aluminium produced", explains Michael Insulán, managing consultant at CRU's aluminium team. "The consumption factor depends on efficiencies at individual smelters, as well as the quality of alumina.

"The fundamental driver of metallurgical grade alumina demand, nevertheless, is aluminium production. Alumina demand growth has always been very healthy and CRU forecasts it to stay healthy."

It's a similar situation for demand for aluminium itself, according to Kamil Wlazly, a senior research analyst at global energy, metals and mining research and consultancy group Wood Mackenzie. This is particularly true within the automotive market; a new, high growth area for the base metal. "Older established markets like construction and packaging have been slightly slower, but in the automotive sector, we are seeing a lot of OEMs introducing lighter materials (due to increasingly stringent emission standards) and aluminium has been benefiting from this, especially in the US but also in Europe," he says.

"We're seeing more and more cars been built out of aluminium, and this will definitely be an area of practical growth for aluminium demand. Overall, aluminium has never been a demand story market; it's always been a supply story market. It tends to be the strongest metal among all the base metals in terms of demand, but supply has always more than compensated, and it's this that keeps the prices low."

Plugging the bauxite gap

Production of alumina, and subsequently aluminium, can only continue to grow if the sector is supplied with enough bauxite. However, this didn't seem so certain in 2014 due to Indonesia's raw ore exports ban, which came into force in January of that year but was soon repealed.
As Insulán summarises: "Since 2005, when China installed the first few low-temperature refineries, it generally relied on Indonesian gibbsite, a type of bauxite with high trihydrate content which can be processed in low-temperature refineries which, in turn, are more energy-efficient than high-temperature refineries that process boehmite or diaspore. The implementation of Indonesia's unprocessed minerals export ban in January 2014 put an end to this.

"However, Chinese refineries and traders had already amassed significant stocks of Indonesian bauxite in the run-up to the ban so this was not an immediate problem. And within months, Malaysia came to the rescue, essentially limiting any potential positive impact on bauxite prices as a result of the Indonesian ban."

The industry-wide consensus is that Malaysia won't be able to plug the gap for much longer, for instance, the research team at Wood Mackenzie believes the country's supplies will dry out in the medium-term i.e. between 2017 and 2018. So from where will they source bauxite?

According to CRU's database, there are more than 100 bauxite projects in the world. Only a portion of these will be successful, but it should be enough to meet China's demand for the raw material once Malaysia runs out.

Projects of note are China's largest non-state aluminium producer Weiqiao's Katougouma mine in Guinea. The operation is a joint venture between Weiqiao as buyer, Winning for sea freighting, Yantai Port Logistics for river transportation, and Societe Miniere de Boke (SMB) and UMS International for mining operations. A 10% stake is owned by the Government of Guinea, as per the country's mining law. Bald Hill-owned by Australian Bauxite is another example, as well as an assortment of mines in Australia, Guinea and Brazil that hold promise.

No rising star in metal

So, what's the future of the aluminium market? Overall, the whole value chain - bauxite, alumina and aluminium - will retain ready supplies, although cuts will be necessary in some areas.

"Aluminium need curtailments, it's a wholly oversupplied market, whereas alumina is a bit tighter but still needs curtailments."

"Aluminium need curtailments, it's a wholly oversupplied market, whereas alumina is a bit tighter but still needs curtailments, particularly in China, for prices to come up again," Insulán says, adding that despite scaremongering about China being unable to source bauxite imports when Malaysian supplies fail, CRU does not believe there will be an absolute shortage of the material.

"There are multiple projects vying for Chinese business, although because these projects are a bit more costly than Malaysia, in terms of mining costs and logistics, bauxite will become more expensive to Chinese refineries as Malaysian bauxite exports drop off."

When it comes to the price of aluminium itself, things are looking up, but only marginally. "Aluminium has not and will not be a star metal in terms of prices," Insulán concludes. "CRU's forecasts for the LME three-month price and LME cash price are $1,500 and $1,469 respectively in 2016, and $1,950 and $1,912 respectively for 2020. In real terms, and in the long-term, there will be a very small increase as a result of rising raw material costs."

"The potentially good places to be in the aluminium value chain, in the future, are probably the very upstream (bauxite) or the very downstream (rolling, sheets, and so on). Refining and smelting will remain squeezed."