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Changing tides for bauxite and alumina


Michael Insulán - 27 July 2016

It has been a tough twelve months for bauxite and alumina. CRU's Alumina Price Index (API, Western Australia FOB) fell by more than 30% between H1 2015 and H1 2016, from an average of $340.79/t to an average of $236.14/t. The refinery curtailments and closures which ensued will have a long-term impact on bauxite and alumina markets, shifting the flows of alumina from East to West, and of bauxite from West to East.

Tough twelve months for alumina

In early January 2015 CRU's API - a benchmark price for global alumina, assessed on a Western Australia FOB basis - traded in excess of $350/t. Twelve months later, in January 2016, the price had dropped to a low of $197/t.

As a percentage of the LME aluminium price, alumina was trading at record highs of 17.9% on average over the course of 2015. But as aluminium prices began to fall in H2 2015, the impact on alumina, in a momentarily oversupplied market, was monumental. In Q1 2016, the API as a percentage of the LME aluminium price averaged only 14.6%; back to the levels seen during the 2008/2009 global financial crisis.

The downward shift in prices hurt suppliers, and although underlying alumina refining costs helped sustain lower prices for longer, some producers had no choice but to curtail or close.

In China, a total of 9.7M tonnes of alumina production cuts took place in the three months between November 2015 and February 2016 (equivalent to 16.3% of China's alumina capacity). Outside China, Alcoa initiated the closures of its Point Comfort refinery in the USA, and its Paranam refinery in Suriname, in order to reduce its cost base.

Furthermore, both Sherwin and Noranda (both in the USA) filed for Chapter 11 bankruptcy protection in early 2016, as a result of the lower price environment, and continued to operate at reduced capacity. On 1 August Sherwin announced the commencement of a shutdown of operations at Corpus Christi. The future of Noranda's Gramercy refinery is still uncertain.

Changing flows from East to West

Since February 2016, 69.9% of China's temporarily curtailed capacity has restarted, however, while Point Comfort and Paranam will remain closed indefinitely.

This leads to a regional imbalance in alumina production and consumption, which in turn affect global benchmark prices.

CRU assesses benchmark prices in the Pacific (API, Western Australia FOB), and the Atlantic (ABP, Brazil FOB). In 2014 and 2015, the Atlantic price traded at a discount to the Pacific price, as the Atlantic was well-supplied and the regional shortage decreased. In Q1 2016, however, the Atlantic discount started to narrow, and in Q2 2016 this trend continued, as the Atlantic became increasingly short again.

Another factor impacting the Atlantic discount is the absolute price level. As can be seen in the previous chart, at very low price levels, the API and the ABP tend to approach on another, thus eliminating the Atlantic discount.
The net trend is that more alumina flows from the Pacific to the Atlantic than previously.

China going farther for bauxite

While alumina goes West, bauxite has increasingly started to flow eastwards over the past 12 months. This is the result of limited bauxite availability in the Pacific, combined with a strategic drive by both suppliers and consumers to increase supply in the Atlantic.

In the Pacific, on the supply side, Malaysia introduced a three month bauxite mining moratorium in the state of Pahang on 15 January 2016. This was extended by a further three months in early April, and again by two months in early July. Currently, the mining moratorium is scheduled to be lifted in mid-September 2016, although there is a risk that it is extended yet again.

The Malaysian bauxite mining moratorium was the direct result of environmental negligence among some miners. Dust and water pollution reached levels where popular opposition to bauxite mining forced the state government to impose a temporary ban on mining. Other reasons - including inconsistent royalty collection, illegal mining and export license irregularities - also played a role, but it was the environmental impact of bauxite mining which ultimately warranted a mining ban.

The mining moratorium, combined with the limited bauxite reserves present in Malaysia, mean that Chinese importers have to look elsewhere for bauxite. With Rio Tinto producing near capacity at Gove and Weipa, Chinese low-temperature refineries turned to the Atlantic in H2 2015.

Weiqiao - China's biggest bauxite importer - has so far been most aggressive. Together with its joint venture partner SMB (and in collaboration with Winning, Yantai, and UMS) they have quickly ramped up Katougouma, a bauxite project north of Rio Nunez in Guinea, and are progressing a second bauxite project south east of Rio Nunez, near CBGs current operations in Guinea.

In 2015, China imported 333,600 tonnes of Guinean bauxite. In January to May 2016, China imported 3.6M tonnes of Guinean bauxite. Still short of the 7.8M tonnes of bauxite that China imported from Australia over the same period in 2016, but growing fast and catching up.

Brazilian bauxite exports to China are also growing fast, mainly as a result of Alcoa's rapid third-party sales. Chinese bauxite imports from Brazil over the January to May period, 2016, reached 1.1M tonnes, compared to 1.6M tonnes over the full duration of 2015.

A massive bet on freight costs

Over the course of 2015, only 6.7% of China's bauxite was sourced from countries in the Atlantic region. In H1 2016, 25.4% of China's bauxite was sourced from the Atlantic.

The main sources, Brazil and Guinea, are each close to 11,000 nautical miles from Shandong province. This raises a major risk relating to freight rates.

CRU forecasts average 2016 Rotterdam bunker fuel rates at $247/t, and the daily rate for Capesize vessels at $7,145/t - with a Brent crude oil price forecast at ~$40/bbl this year. Atlantic bauxite is prospering at a time of an oversupplied dry-bulk freight market and low fuel prices.

But the low rates are unlikely to persist. Historically, annual average bunker fuel and crude oil prices are at the lowest since 2004. Going forward, CRU forecasts an annual - albeit slow - increase in freight costs over the next decade. This will serve to gradually push up alumina refining costs in China.

Opportunities for Australian bauxite

Over the next decade, then, Australian bauxite producers will gain a freight advantage, merely for being closer to China.

Low capex, low opex juniors sitting on large high-quality bauxite deposits stand to gain. And so does Rio Tinto at Amrun, and Alcoa in Western Australia.