ab15 January 2024Global Research and Evidence LabAluminium Will alumina cuts drive aluminium price gains?Supply cuts lift spot alumina price from a protracted period in the cost curve At seaborne (FOB Australia) spot prices of <$350/t in 2023 alumina producer margins were unsustainably low; but in highly integrated supply chains like bauxite/alumina/aluminium cash burn can continue for extended periods. In 2024 supply has finally responded driving China alumina futures up ~30% in the last 2 weeks and seaborne spot prices lifting from <$350/t in Dec-23 to ~$375/t. Supply developments: (1) Guinea bauxite supply: ~70% of China bauxite imports are from Guinea and an explosion at an oil terminal in Conakry in late Dec triggered concerns on supply of bauxite for China's refineries (~55% global output). Thus far we are not aware of any disruption to bauxite output/exports from Guinea; but risks of fuel shortages are likely to remain elevated in 1Q24. (2) China cuts: The combination of environmental checks, concerns over bauxite availability and thin/negative refinery margins triggered ~2.5mt of alumina refinery curtailments (Hongqiao 1.2mtpa and Bosai 1.2mtpa) in late Dec/early Jan. (3) Alcoa cut: On 8th Jan Alcoa announced the closure of the 2.2mtpa Kwinana refinery in Australia (WA); the refinery had been operating at ~80% capacity since Jan-23 so the closure will remove ~1.75mt from the Pacific market from 3Q24. Lift from 'unsustainably' low level…but alumina well supplied medium-term Alumina is difficult to transport/store resulting in 'regional markets' in the Pacific & Atlantic; closure of Kwinana will tighten the Pacific market and is likely to drag the seaborne price from deep into the cost curve closer to marginal cost. Near-term bauxite availability from Guinea may be a constraint for Chinese refineries; but in our view the closure of Kwinana (maybe others) is unlikely to create a structural shortage of alumina. China has installed alumina capacity of close to 100mt, if/when China achieves maximum aluminium output (45mtpa @ >95% utilisation) alumina demand would be ~85mt; therefore China has structural overcapacity and is likely to remain the swing alumina producer but adjusting its net trade position (LTM net imports ~600kt). As a result we do not expect sustainable alumina price upside materially above the cost curve. Higher alumina prices lift aluminium cost curve...but demand recovery needed Like alumina, the aluminium price has spent most of the last 15yrs at or into the cost curve. The increase in the alumina price will increase cost pressure for non-integrated smelters at the top of the cost curve; but moderating gas/power prices in Europe (marginal producer) are likely to provide some offset. Profitability for European smelters towards the top of the cost curve is marginal; but in our view the recent lift in alumina i...
