2019 PREVIEW: China alumina price faces pressure from easing demand, ample supply
A drop in demand for alumina and supply from new projects coming on stream in 2019 will put Chinese alumina prices under pressure next year, according to market participants.
Multiple factors including the suspension and relocation of operations, over-winter production cuts, and flexible production schedules to meet reduced demand, will lead to reduced production of aluminium in China in 2019.
At the same time, Chinese alumina producers are bringing new alumina operations on stream at home and abroad.
Fastmarkets assessed the Chinese domestic alumina price, delivered duty paid, at 2,095-3,050 yuan per tonne on December 6, down from a recent peak of 3,150-3200 yuan per tonne on November 8. This was its fourth consecutive weekly fall.
The aluminium price on the Shanghai Futures Exchange is at historically low levels, which has also put downward pressure on the market. Alumina accounts for around one third of the cost of aluminium production.
The SHFE January price settled at 13,525 yuan per tonne on December 6, its lowest since January 2017 and down 15% from the 2018 peak of 15,965 yuan per tonne in April following the announcement of US sanctions on Rusal.
The low aluminium price prompted some smelters to suspend operations to avoid making a loss on their production, which traders noted will lead to a build-up in alumina stocks in China and a probable further drop in prices next year.
“I heard too many plants closed because of the current low aluminium price because they can’t afford more losses,” a market participant in Xinjiang said.
Beijing Xinheng Group has suspended 170,000-180,000 tonnes per year of its aluminium capacity in Xinjiang Province since mid-November – more than half its total capacity of 350,000 tonnes – “due to weak demand and the low [aluminium] price in China,” a Xinheng Group official told Fastmarkets.
The company sold the alumina it had purchased for the production of aluminium “to the spot market at a higher price than now because we forecast the price would drop”, he added.
As well as cutting production, some producers are relocating capacity to parts of the country where operating costs are cheaper in the hope of mitigating the impact of what is widely expected to be a tough 2019.
Shenhuo Group, which has capacity of 900,000 tpy, and Zhongfu Industrial, which has capacity of 750,000 tpy, will shift their production lines to Yunnan Province and Sichuan Province, market sources claimed.
“They need to close the old one and reapply to build in the new places, which means a reduction in production right now as rebuilding takes time,” a market participant said.
China’s largest aluminium producer, Chalco, has anticipated weak domestic demand by introducing “flexible” production, which may affect up to 470,000 tonnes of output based on “market conditions” and “government environmental restrictions,” it said.
China’s winter cuts policy, which requires aluminium plants to reduce output during the country’s heating season from mid-November to mid-March, will also result in reduced output throughout the first quarter of 2019.
“With so many cuts [in aluminium], alumina supply will be plentiful in the first half of next year, dragging prices lower,” an alumina trader in Shanghai said.
Supply of alumina is set to increase as a result of new alumina projects launched from Chinese companies. The majority of the projects are located outside China to avoid the tightening environmental restrictions.
Shandong Nanshan Aluminium Corp announced in October it will invest $836 million in a 1-million-tpy alumina project in Indonesia, while late last month, SMB Winning Consortium signed an agreement with the government of Guinea in West Africa for a project with the same capacity.
The Guinean government also approved a 1-million-tpy alumina project from Shanghai Stock Exchange-listed Xinjiang Join World.
These projects will provide an increasing amount of supply for the Chinese market, with the companies shipping back production into the domestic market.
China will also have ample supply of imported bauxite for its current alumina refineries, with new projects from Alufer and Rio Tinto providing extra supply.
Rio Tinto’s Amrun project in Queensland, Australia, shipped its first bauxite cargo six weeks ahead of schedule while Alufer’s first shipment of bauxite from its Bel Air project in Guinea arrived in China in late November.
This year, China demonstrated its influence in the global alumina market by turning exporter when the Atlantic and Pacific markets became progressively tighter.
In April, a 50% cut in output at Hydro’s Alunorte refinery in Brazil – the world’s largest – due to environmental restrictions sent shockwaves through the market and put the global alumina market in significant deficit.
Alunorte is the world’s largest alumina refinery, with an annual capacity of 6.3 million tonnes. Hydro’s Paragominas bauxite mine is also running at a production rate of 50%, in accordance with Alunorte’s run rate, while the company’s Albras aluminium plant in Brazil is also running at 50% because of the reduced alumina supply.
Fastmarkets’ benchmark Australia index consequently powered to a record high of $707.75 per tonne and the China alumina price surged to 3,100-3,200 yuan per tonne on April 26.
The Chinese market filled gaps in the market last year when Alcoa workers went on strike at its refineries in Western Australia throughout the summer months.
If the Alunorte issue is not resolved in 2019, or there is further disruption to the Atlantic and Pacific market, Chinese producers could benefit by continuing to export in volume.
“China covered the supply hole in the benchmark Australian market last year, and people were happy with the quality of their Chinese alumina,” a European trader said.
“If there are any issues again, people will look to buying their alumina in China once again and it will have a positive impact on the domestic Chinese prices,” he added.
Chinese alumina has become more widely accepted by clients in the Australian and Brazilian markets, Western trading houses said. Previously, some smelters did not have the flexibility or internal approvals to accept Chinese material, but market sources told Fastmarkets that Chinese alumina performed well in smelter trials and some had diversified their feed to accept it.
Chinese material was a good option at cheaper prices for some in an environment where high alumina prices are squeezing smelter profitability.
“If there is tightness in the Australia market, Alunorte doesn’t return and China has ample supply, people will look there for better prices and it could keep the Chinese market firm for 2019,” a producer said.
Alunorte, which the market expects to resume production at full capacity next year, will be the swing factor for the global market alongside whether the United States government removes its sanctions on UC Rusal.
The US extended its deadline for winding up contracts with Rusal, which accounts for about 7% of the world’s alumina supply, again to January 27, having originally imposed sanctions on the Russian producer in April.
“The majority of the market expects Rusal to solve its situation next year. The constant extensions of the deadline shows the US government does not want to cause any more drama in the market,” a second European trader said.
“But, who knows, and if Rusal do not come back into the fold soon then it keeps the global alumina market tight and that will be positive for China’s domestic prices,” he added.