2020 PREVIEW: Alumina prices widely seen by market as suppressed in 2020; consumers investing upstream
Benchmark alumina prices have failed to trade above $300 per tonne since August 2019 and are likely to remain under pressure in 2020 partly because aluminium companies are diversifying along the supply chain, market participants said.
There has been a sharp drop in alumina prices in 2019 - Fastmarkets’ benchmark alumina index, fob Australia averaged $279.56 per tonne in November, 26.8% lower than the January average of $381.69 per tonne.
This is a stark difference from the dramatic price rises of 2018 caused by the 50% curtailment at Norsk Hydro’s Alunorte refinery, which pushed the index up to a record high of $707.75 per tonne.
The rapid rise in prices prompted some consumers to invest in alumina assets and aluminium companies to streamline their portfolios.
“Although prices in the last six months have been kinder to consumers for their margins, everybody has the 2018 spike in the back of their minds - and a number of companies decided to change the way they do things,” a consumer source said.
Aluminium producer EGA began production at its new Al Taweelah alumina refinery in April. It is the first alumina refinery in the United Arab Emirates.
The refinery is expected to produce around 2 million tonnes per year of alumina when it is fully ramped up in 2020. It will meet around 40% of EGA’s alumina feedstock needs, meaning the consumer will require significantly less alumina from the spot market.
“Al Taweelah alumina refinery, and our bauxite mining project in Guinea where construction continues, secures our supply of raw materials at competitive prices and will strengthen EGA’s business for decades ahead,” Abdulla Kalban, EGA’s managing director and chief executive officer, said earlier this year.
The $3.3-billion investment comes after EGA’s net income dropped by 64% in 2018 due to high raw materials costs. Last year the company’s net income fell to 1.2 billion UAE dirham ($277.7 million) from 3.3 billion dirham in 2017.
“The new EGA refinery means they do not need to compete for every tender, it takes one more buyer out of the situation. And we are already expected to be in surplus,” a trader source said.
Alongside EGA’s new refinery, Press Metal, the largest aluminium producer in Southeast Asia, in November finalized a shareholder agreement with Bintan Alumina Indonesia (BAI) for 25% of the company, which will allow them to “secure a long-term supply of alumina.”
The investment will go toward a second phase of the Indonesia-based alumina project to double capacity to 2 million tpy. When the refinery is fully operational it is expected to supply Press Metal’s smelter with 70% of its alumina needs.
“Companies are finding ways to divest their assets. Nobody wants to be caught short if another refinery gets into a Hydro situation again, if you can diversify then you will cover yourself,” a producer source said.
“But it puts spot prices under pressure because there will be more supply around and less demand. It’s not great when aluminium demand is bad enough as it is,” he added.
“[Alumina] prices hitting $707 per tonne and even being at over $500 per tonne for a sustained amount of time really opened people’s eyes - especially the big aluminium companies that had been leaving their alumina book separate,” a second trader source said.
“A lot has changed in 2019 with companies diversifying how their aluminium supply chain looks internally and that’s to stop the worrying margins happening again,” he added.
In March, trading house Glencore merged its aluminium and alumina departments, with Robin Scheiner heading it following the departure of David Streule.
Trafigura also reshuffled its non-ferrous metals teams with Philippe Mueller, who was the global head of refined aluminium, now in charge of the alumina business as well and promoted to global head of aluminium and alumina in May, Fastmarkets reported in May.
“Our merged books enable us to take a more holistic approach to meeting our customers’ requirements in terms of long-term supply security and tailor-made financing solutions. Overall trading volumes increased again this year and we were able to further strengthen our global position as the largest global independent alumina and aluminium trader,” Trafigura said in its 2019 annual report on December 11.
“Everything is more streamlined now with a lot of companies; people are looking at the supply chain as one big picture,” a second consumer source said.
“In 2018, the ridiculously high alumina prices were killing smelter margins but this year the rubbish aluminium demand is killing alumina prices. It is all connected - it always is,” he added.
Producer Alcoa also made big changes in November; restructuring meant Timothy Reyes is now charge of the aluminium supply chain, while the executive vice presidents and presidents of alumina, and bauxite left the company.
Surplus market for 2020
On top of the new projects, Hydro’s Alunorte refinery in Brazil will be back to operating at full capacity from 2021, adding extra tonnage back to the market.
The refinery’s utilization rate reached 83% of its capacity in the third quarter of this year following the end to federal court-imposed embargoes. Its full production capacity is 6.3 million tonnes.
“The main thing is next year there is going to a surplus. We have poor aluminium demand, poor aluminium prices are low and there will be excess alumina,” a third trader source said.
Alcoa said in October that it expects a surplus of 1-1.8 million tonnes for the end of 2019. While at the end of this year, they also predict a large surplus of 15-19 million tonnages of bauxite.
The benchmark daily alumina index, fob Australia, was calculated at $278.19 per tonne on December 16. It has remained stable roughly between $270 and $280 per tonne for several weeks.
“The last month or so we have seen a more stable alumina market but little chance for it to rally much higher - I think that will be the story next year too unless there is a big production cut,” the first trader source said.
Demand from China continues to support prices in Australia from falling even lower but China has imported a significant volume recently and now domestic Chinese prices are falling.
Alumina metallurgical grade, ddp China has fallen to 2,330-2,450 yuan ($333-351) per tonne as of December 12 from 2,500-2,600 yuan per tonne at the start of November.
“We can’t continue to rely on China unless they switch off some production and consistently need to import. The way things look for 2020 it is bearish for the alumina market,” a fourth trader source added.
The benchmark London Metal Exchange aluminium three-month price averaged $1,765 per tonne in November, down from $1,949 per tonne in November 2018. Aluminium premiums have also been suppressed by a persistent backwardation in LME spreads.
Fastmarkets’ aluminium P1020A, in-whs dup Rotterdam, premium was $80-90 per tonne on December 16, significantly lower than September when it was at a high of $105-115 per tonne.
“Demand along the whole supply chain isn’t great right now and in the immediate near term there doesn’t seem a good argument for stronger alumina prices,” the first consumer concluded.