High-flying aluminum may surge even higher

• In a stellar year for base metals, aluminum has led the pack. Now, producers say surging raw material costs could drive prices even higher.

Alumina, the raw material used to make aluminum, has jumped 56 per cent since August after China shut down some production, triggering a wave of buying by traders and aluminum smelters. The rally is putting a strain on metal producers in China, where alumina accounts for 40 per cent of the cost of making aluminum.

Cost pressures c ould worsen in the months to come as Chinese environmental reforms weigh most heavily on bauxite and alumina producers. That may give extra fuel for aluminum’s 28 per cent rally this year, the biggest since 2009.

“The rise in raw material prices is lifting the global cost curve for aluminum production and that should support higher prices,” Svein Richard Brandtzaeg, chief executive officer of Norsk Hydro ASA, said. Prices for other key aluminum inputs including caustic soda, carbon anodes and pet coke have also jumped, he said.

The rally in aluminum and other metals shows how China’s changing policy goals can upend commodity markets. The economy has shifted to a period where high quality is sought, moving away from its fast-growth era, President Xi Jinping said during the National Congress in October. Aluminum gained 1.8 per cent to US$2,199 a metric ton in London, near a five-year high.

While China’s shutdowns of aluminum smelting were likely to be seasonal, alumina production could be permanently affected, according to Mark Hansen, chief executive at mid- sized metals trader Concord Resources Ltd.

“The upstream supply has been really squeezed. While most smelters aren’t going to permanently close,” he said, meaning smelters are “stocking up on alumina for when they restart production.”

Alumina was US$479 a ton on Oct. 26, up from US$306 at the start of August, according to CRU Group. Brandtzaeg said Norsk Hydro recently sold cargoes at close to US$500, and he sees high prices persisting as China supply curbs bite.

Alumina is now trading at about 22 per cent of the aluminum price, a record high and an “extreme” reading, according to UBS Group AG analysts. They said the ratio isn’t sustainable unless aluminum prices increase or alumina retreats.

Alumina Ltd., an Australian miner with operations in China, has said environmental inspections limited bauxite mining in Henan and Shanxi provinces since August. Chinese production cuts over the winter would reduce aluminum production by one million tons and alumina by 2.5 million tons.

The main winners are companies that are big producers of both alumina and aluminum. State- owned Aluminum Corp. Of China Ltd, reported net income that jumped almost 11- fold in the third quarter.