ALU­MINIUM PRIC­ING TEN­SIONS MOUNT IN MA­JOR METAL MAR­KETS

The Gulf Today - Business - - SPECIAL REPORT -

The alu­mina price is on a charge again. The CME cash con­tract, in­dexed against Platts’ as­sess­ment of the Aus­tralian price, is cur­rently quoted at $626 per tonne, just shy of the record $643 seen at the start of May.

In China spot prices are at their high­est since De­cem­ber last year, ac­cord­ing to Shang­hai Met­als Mar­ket.

A walk-out by unionised work­ers at three Aus­tralian alu­mina re­finer­ies has in­jected yet more un­cer­tainty into an al­ready prob­lem­atic sup­ply equa­tion.

What has his­tor­i­cally been a highly ef­fi­cient part of the alu­minium pro­duc­tion chain is ex­pe­ri­enc­ing an un­prece­dented de­gree of turmoil this year.

There is the po­ten­tial for short­term re­lief if the strike at AWAC’S fa­cil­i­ties ends and Nor­we­gian pro­ducer Hydro can per­suade the Brazil­ian au­thor­i­ties to al­low full op­er­a­tions at its Alunorte re­fin­ery.

How­ever, a loom­ing dead­line for the lift­ing of sanc­tions on Rus­sian pro­ducer Rusal is fast ap­proach­ing and China’s alu­mina pro­duc­tion sec­tor is be­ing rocked by en­vi­ron­men­tal crack­downs.

It seems un­likely that the sup­ply dis­rup­tion pre­mium is go­ing to un­wind fully any time soon.

That in turn poses hard ques­tions for alu­minium smelters, given the im­pact of such a high in­put price on op­er­at­ing mar­gins.

The Au­gust 8 strike by around 1,500 work­ers at two baux­ite mines and three alu­mina re­finer­ies op­er­ated by AWAC, owned by Al­coa and Alu­mina, is the new dis­rup­tor in an al­ready dis­rupted sup­ply chain.

The walk-out is now in its sec­ond month af­ter mem­bers of the Aus­tralian Work­ers Union voted late last week to re­ject a new pro­posed work­place agree­ment.

AWAC has con­tin­gency plans to keep the op­er­a­tions run­ning but con­ceded in a Sep. 7 state­ment that the ac­tion had cost around 15,000 tonnes of lost alu­mina out­put in Au­gust, a fig­ure that is only likely to rise as the strike con­tin­ues.

The sup­ply hit would have had lit­tle im­pact on a near 120 mil­lion tonne mar­ket in other years.

But this year the mar­ket has al­ready been roiled by the par­tial clo­sure of Alunorte, which with annual ca­pac­ity of around six mil­lion tonnes is the world’s largest sin­gle alu­mina re­fin­ery.

Or­dered by a Brazil­ian court in Fe­bru­ary to cut run-rates by half, Hydro ap­pears to be inch­ing to­wards a res­o­lu­tion of the dis­pute over al­leged pol­lu­tion.

It has signed two agree­ments with the state gov­ern­ment of Para, the site of the re­fin­ery, cov­er­ing ex­tra in­vest­ments for lo­cal com­mu­ni­ties.

The olive branch should be “an im­por­tant step to­wards re­sum­ing op­er­a­tions”, the com­pany said, al­beit with­out con­firm­ing any restart timeline.

If the green light is given, it would take Alunorte around one month to re­turn to full-ca­pac­ity op­er­a­tion.

STRUC­TURAL TEN­SIONS

While one sup­ply source of alu­mina dis­rup­tion edges to­wards res­o­lu­tion, an­other one is re­turn­ing.

The trig­ger for the su­per­charged rally of April and May was the im­po­si­tion of US sanc­tions on Oleg Deri­paska and his Rusal em­pire.

Although Rusal ap­pears to be ver­ti­cally in­te­grated from baux­ite through alu­mina to alu­minium, the mar­ket found out that the com­pany’s in­ter­nal sup­ply chain is a lot more com­plex.

Specif­i­cally, the Augh­in­ish re­fin­ery in Ire­land runs on baux­ite sup­plied by Rio Tinto, which in turn takes a size­able part of the re­fin­ery’s alu­mina to sup­ply smelters in Western Europe.

It was the po­ten­tial un­rav­el­ling of that tolling ar­range­ment that trig­gered the rally to above $600 per tonne.

Things were calmed when the United States ex­tended its sanc­tions dead­line un­til Oct. 23.

But the clock is now tick­ing and although the US au­thor­i­ties have made sooth­ing noises, the sanc­tions re­main in place.

This is al­ready pos­ing prob­lems for the com­pany’s metal cus­tomers as they ne­go­ti­ate 2019 con­tracts, but it must be fo­cus­ing minds at Rio Tinto as well.

China, mean­while, is play­ing a key bal­anc­ing role, ex­port­ing higher than usual amounts of alu­mina to help plug the gaps in the rest of the world.

But China’s alu­mina re­finer­ies are them­selves ex­pe­ri­enc­ing struc­tural ten­sions rooted in the coun­try’s clean-skies pol­lu­tion mea­sures.

Chi­nese baux­ite flows have been dis­rupted by en­vi­ron­men­tal in­spec­tions while there is an in­creas­ingly hos­tile pub­lic re­ac­tion to build­ing new plants. The prov­ince of Liaon­ing can­celled five po­ten­tial projects with cu­mu­la­tive ca­pac­ity of al­most 30 mil­lion tonnes last month.

More­over, there is the po­ten­tial for more ca­pac­ity cur­tail­ments over the com­ing win­ter heat­ing sea­son.

Pro­duc­tion dis­rup­tion dur­ing last year’s win­ter smog re­stric­tions sent Chi­nese alu­mina prices soar­ing and they too are now march­ing higher.

Alu­mina is the key metal­lic in­put to the alu­minium smelt­ing pro­cess­ing. A rough rule of thumb is that it takes two tonnes of alu­mina to make a tonne of re­fined metal.

Alu­mina is now around 30 per cent of the price for alu­minium, cur­rently quoted at $2,075 per tonne on the Lon­don Metal Ex­change.

That ra­tio has his­tor­i­cally been in the high teens, plac­ing an ex­tra­or­di­nary amount of pres­sure on smelter mar­gins.

“Chi­nese pro­duc­ers are barely break­ing even and ex-china mar­ginal pro­duc­ers are los­ing money,” ac­cord­ing to an­a­lysts at Gold­man Sachs. (“Met­als Mon­i­tor”, Sept. 10, 2018)

The cur­rent di­ver­gence be­tween a high and ris­ing alu­mina price and a largely stag­nant metal price looks un­sus­tain­able.

Ei­ther the alu­mina price will have to come lower or the alu­minium price will have to start ris­ing to re­flect ris­ing costs.

Gold­man is bet­ting on the lat­ter, ar­gu­ing that “poor prof­itabil­ity should slow new smelters com­ing on­line and cost-push should drive alu­minium prices higher in the near term.”

The bank, which is fore­cast­ing the price to av­er­age $2,300, $2,200 and $2,000 over three-month, six-month and 12-month pe­ri­ods re­spec­tively, likes “alu­minium the most among the base met­als over the next few months”.

Of course, things could change quickly, if the AWAC strike ends, Alunorte re­turns to full ca­pac­ity and the United States drops its sanc­tions on Rusal.

But this is the year that the alu­mina sup­ply change has been re­ally tested for the first time in decades and it has proved to be much more brit­tle than thought.

The alu­mina price may lose some of its heat if the un­usual cock­tail of one-off sup­ply hits is dis­persed, but struc­tural shifts in China may trans­late into a higher and more volatile “fair value” price than has been seen in the past.

CHI­NESE PRO­DUC­ERS

China’s alu­minium pro­duc­ers cut out­put by 3 per cent in Au­gust from the month be­fore, gov­ern­ment data showed on Fri­day, as high raw ma­te­rial costs squeeze their profit mar­gins.

China, the world’s big­gest alu­minium pro­ducer, churned out 2.84 mil­lion tonnes of the metal last month, ac­cord­ing to the Na­tional Bureau of Sta­tis­tics (NBS).

That was down from 2.93 mil­lion tonnes in July, which matched the all-time monthly high, but was up 7.8 per cent from a year ear­lier, the NBS said.

On a daily ba­sis, China pro­duced around 91,600 tonnes of pri­mary alu­minium last month, the low­est since May, ac­cord­ing to Reuters cal­cu­la­tions based on the data.

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