Following yesterday’s article we posted on the cost of electricity in the production of primary aluminum, we thought it would be interesting to review the other elements that go into the cost of manufacture for primary aluminum produced from alumina.
As with the electricity costs, rates appear to vary from producer to producer and there is certainly a lot of variation among different sources on the percentage of the finished price that any particular constituent makes up. Why would you speak of the raw material costs as a percentage of the sales price for ingot I hear you ask, why not just look up the quantity of each raw material used to make one ton of aluminum ingot and build up a cost of production that way? Well that is a valid approach except that some of the principal raw material costs are actually priced in relation to the LME aluminum ingot price, so the unit price moves up and down ” mostly down these last 6 months ” with the LME quotation.
The principal cost elements are:
- Carbon anodes
- Management & labor
- Gas for heating
- Chemicals, principally cryolite
- Mill overheads
Of these, the electricity, alumina and in many cases, the carbon costs relate to the ingot price which allows the smelters to continue to operate even as ingot prices fall. It does leave manufactures of products like carbon anodes exposed on the downside, for example Chalco, China’s largest producer, dropped its anode price to RMB 2,000/ton in January due to the low ingot price but the cost of production was reported to be RMB 2,500-2,800/ton according to China Mining, plunging the anode division into loss. When Chalco is a major ingot producer and a major anode producer it is more a matter of which division takes the profit and which the loss. But Chalco also exported 52,000 tons of anodes in 2008 meaning they probably honored overseas contracts at a loss in the second half of the year.
The carbon anode manufacturers themselves are almost as exposed to global oil and coal costs as the electricity component of the aluminum cost base. Anodes are made from petroleum coke and recycled carbon mixed with liquid pitch and then a very significant amount of heat as the anodes are baked for 18-20 days at over 1000 degrees C. So as the oil (and coal) price has tumbled, so has the cost base of anode makers (although not far enough in Chalco’s case) to the extent to which they are able to buy on the spot market rather than on long-term contracts.
The electricity element of the price varies widely as we explored in more detail previously. The average may be about 25% globally, with high and low extremes in China (40%) and Russia (10-15%) respectively. Our cost build-up model appears in the following table:
|Management & Labour||8%||104|
|* assuming $1300/ton where percentage of LME is the pricing norm|
We have seen the cost of alumina and electricity expressed as larger percentage shares than this by some commentators so this is an average of many sources.
We would welcome comments from readers either via the comments section or in confidence to Stuart Burns at sburns (at) aptiumglobal (dot) com with your views, observations or better still insider skinny on what the mills are really paying. Any information given in confidence will be treated anonymously or averaged as directed.