Refineries struggle to stay cash positive with alumina prices at Feb 2016 low

Alumina refineries are struggling to stay above the cost curve with prices at four-year lows, while smelter cuts upstream could further widen refining losses.

Market participants warned that we have not yet hit the floor for alumina prices, but the possibility of the return of Chinese demand could provide some bullish sentiment.

Fastmarkets’ daily alumina index, fob Australia was calculated at $226.51 per tonne on Wednesday April 8, down by $4.11 per tonne from $230.61 per tonne the previous day.

The index is now at its lowest since February 19, 2016, when it was $219.60 per tonne.

A number of market participants told Fastmarkets that nearly 50% of the global refining capacity could be underwater in terms of cash costs at the current alumina index level.

“Some refineries have production costs upward of $260 per tonne and are losing a lot of money right now. But they are trying to battle through,” a consumer source said.

“With so much alumina production underwater I don’t think the alumina price is sustainable without impact on production,” a market source said.

Market participants told Fastmarkets that the underlying input cost for alumina is less due to lower caustic and oil prices – and should remain so for a while.

This could be why, although alumina prices are so low and some are running at a loss, we are yet to see a major cull of refineries.

“I think the caustic prices are likely to remain subdued for the next 6 months or so at least due to spare capacity in chlor-alkali plants. Chlorine production looks like it is coming off, which will mean less caustic produced but not enough to create too much tightness,” the market source said.

“There has been some dip in bauxite prices, coal is falling, caustic and oil are cheaper, but despite that, with the latest spot levels for alumina around $220-230 per tonne, prices are cutting deep into the cost curve,” Duncan Hobbs, research director at Concord Resources, told Fastmarkets.

Fastmarkets assessed the price for bauxite, fob Kamsar, Guinea at $35 per tonne on March 19 down by $1 per tonne from $36 per tonne a month earlier.

Despite current costs, participants said it was hard to judge where the floor would be for alumina prices in the current market.

“Every time I think we would have hit the floor, a deal comes in lower. I just feel it is impossible to tell right now,” a trader said.

“The floor could be some distance away, alumina could even touch $200 per tonne or lower,” a second consumer source said.

The last time the alumina index was below $200 per tonne was between December 2015 and January 2016.

Traders said there was good availability for May cargoes and some producers have a lot of availability for dates further out.

Smelter cuts pose biggest risk
The aluminium price taking a battering is not helping to stoke any positive news for the market or alumina’s price direction.

The London Metal Exchange three-month aluminium price hit a four-year low of $1,459.50 on March 6 and continues to trade below $1,500 per tonne.

“With that aluminium price who knows how low alumina prices will go, it is literally soul destroying,” a second trader said.

The low LME price means that smelter cuts will be in the thoughts of a lot of aluminium producers, which could put further pressure on alumina prices – if no refinery cuts are made to match it.

“A short-term risk for alumina is that we see reductions in aluminium smelting production… Alumina refineries have more flexibility in the way they operate than aluminium smelters,” Hobbs said.

“One key pivot point for aluminium is whether people buy into the buoyant mood we have seen in other markets over the past week or so,” he added.

The sooner that smelters anticipate a coronavirus containment or economic recovery, the less likely any decision will be made to cut production even if operations are cash negative now.

But if recovery is deemed to be a long way off, or demand is expected to remain so significantly low despite the market recovering from Covid-19, smelter cuts could be forced.

“In our opinion, there is no end in sight to the weak demand, nor presumably to the declining premiums. The low aluminium premiums, and above all the low aluminium prices, are making life increasingly difficult for producers,” Commerzbank analyst Daniel Briesmann said in a note on Tuesday.

“Alumina production is likewise set to be scaled back because prices for this raw material of aluminium have literally plummeted, particularly in recent days,” Briesmann added.

Ball is in China’s court
A glimmer of hope for the alumina market came after a buyer in China purchased an alumina cargo for early May loading on Wednesday.

The deal was concluded on a cif China main ports basis at $240 per tonne for Western Australian material. This was the first cargo purchased for delivery to China since early March.

“Although the deal level is lower again it might give people some hope that the market can rebound eventually and there might be a sign of some demand,” the first trader added.

China bought a lot of alumina from Western Australian producers at the beginning of the year. Between September 2019 and February 2020, some 460,000 tonnes of Western Australian alumina was sold to China.

But liquidity dried up after Chinese New Year when prices began to decline and the Covid-19 outbreak across the globe caused further uncertainty.

“If the Chinese do not recommence importing alumina once the Australian price stabilizes, then if the low pricing continues much longer, some of the higher cost, non-integrated refineries may struggle to stay open, even though curtailment and restart costs (outside China) are high,” the market source said.

“The Chinese stop buying when the alumina price is falling – as they think if it falls further they can buy alumina cheaper- so there have been a number of potential Chinese buyers hanging back,” he added.

The loss of buying demand from China caused alumina prices to dive quicker than many expected. Current prices are around 25% lower than a month ago, when Fastmarkets’ index was still above $300 per tonne.

Market participants also told Fastmarkets that they also have one eye on any disruption to bauxite supply, which could provide some upside for alumina prices – especially if Chinese refineries cannot import.

“If anything goes wrong in the supply chain then those producers who have built bauxite into their refinery chain will be better off. It only takes a few disruptions to turn the market on its head,” the first consumer source said.

China relies heavily on Guinea for imports of bauxite. According to Chinese customs data, China imported 44.45 million tonnes of the material from Guinea in 2019, up by 16.49% year on year.

In 2019, China imported 100.66 million tonnes of bauxite, compared with 82.57 million tonnes in 2018.

“We should be mindful of the risk that the spread [of Covid-19] could have on raw materials. China has been a big importer of bauxite, currently at a record high, and a lot of this comes from Guinea,” Hobbs concluded.

“If there was a significant outbreak in West Africa we could see huge disruption to the supply chain.”