FOCUS: Aluminium, alumina price divergence puts smelters at a loss

With alumina prices at extremely high levels and supply tightness showing no signs of easing, market participants are starting to question when downstream aluminium prices and premiums will begin to react.

Limited spot availability following a force majeure at Hydro’s Alunorte refinery and strikes by Alcoa workers at its Pinjarra refinery has been continuously pushing the alumina price higher. Metal Bulletin’s benchmark fob Australia alumina index is now above $600 per tonne. This time last year, the index stood at $354.20 per tonne.

Meanwhile, the London Metal Exchange three-month aluminium price has remained steady at just over $2,100 per tonne, with little reaction to the shortage of raw materials, and premiums are also steady.

Alumina in Australia is now trading at 30% of the LME aluminium price. Traders spoken to by Metal Bulletin note that when the alumina price rises above 19% of the aluminium price, smelters start to lose money.

“Something in the market has to give, and it will not be the alumina price. The LME price or the premiums have to move in tandem,” a consumer said.

“The current levels are not sustainable. There is not a smelter on this earth that can be making money the way things are,” he added.

The Australia index peaked at an all-time high of $707.75 per tonne in April after the United States Treasury announced sanctions against Russian aluminium producer UC Rusal, causing market panic.

Since then, the benchmark has remained mostly above $500 per tonne. By comparison, the alumina index did not trade above $360 per tonne between 2012 and 2016.

“The alumina price is far too high a proportion of the LME outright price, and has been for some months, it is not sustainable and the LME price has to move,” a trader said.

“Even at $2,100 per tonne, smelters are not making money and some are running at a loss,” a second trader added.

Many market participants expect the alumina index to climb over $700 per tonne in the next few weeks with some traders already offering between the $650 and $700 per tonne level.

“We are now trading over 30% of the LME average and I think price will still go higher as the Australia strike situation is affecting 9 million tonnes of production,” a third trader said.

Strikes by Alcoa workers in Western Australia have been ongoing since the beginning of August, and workers are set to vote on whether to accept a new offer by Alcoa.

The vote is expected to close on Thursday September 6 and if no outcome is reached, the continuation of the strike is expected to have a great impact on alumina production, sources close to the matter told Metal Bulletin.

Many market participants have already noted an increasing number of delayed shipments from Alcoa during the strike period.

Filtering down to aluminium premiums
If aluminium exchange prices continue to ignore the excelling prices of the raw material, we could see the price factored into aluminium premiums.

Premiums have remained relatively steady during the summer months, with the market keeping one eye on developments with the Rusal sanctions.

Metal Bulletin’s benchmark aluminium Rotterdam duty-unpaid premium was at $82-92 per tonne as of September 4 – unchanged since August 22.

“[Alumina prices] should be a bullish factor for the outright exchange prices but if not, the second step is for there to be a reflection in the premiums,” a fourth trader said.

“Certain smelters may not be able to take alumina from Rusal anymore depending on what the announcement [on the next stage for the sanctions] brings and this could create more interesting issues on a regional basis,” he added.

A number of traders have said that if the LME price does not react soon, they will begin to price the high alumina price into their premiums.

“The premiums will have to take [alumina price rises] into account and push higher. Offers for 2019 are nearing the $120 per tonne mark and when alumina gets factored in, I would imagine the spot market to hit $100 per tonne again too,” a fifth trader said.

“The market is on a crazy rollercoaster and the premiums have to keep up,” he added.

Soaring alumina prices will add to the continued number of factors which provide bullish sentiment to the aluminium market over the next few months.

The official deadline for the Rusal sanctions is October 23, but a number of market participants note that if there is no resolution by the end of September, Rusal could begin to cut production.

And with LME aluminium on-warrant stocks at a decade-low of 774,200 tonnes, the market could be very tight as 2019 deals approach.

“There isn’t a single reason to be bearish about the aluminium market at the moment. Everybody is poised and waiting to see what happens but I expect the premiums to climb higher,” the first trader said.

“If you are trying to secure metal for next year – and you want it to be reliable – you have to pay a high premium due to the alumina situation and Rusal,” he added.

The 33rd Metal Bulletin aluminium conference will be held in Berlin on September 12-14.