Cost Build Up Model for Primary Aluminum Ingot Production

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Non-ferrous Metals

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:

  • Alumina
  • Electricity
  • Carbon anodes
  • Management & labor
  • Gas for heating
  • Chemicals, principally cryolite
  • Spares
  • 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:

Percentage Current cost*
Percentage Current cost*
Alumina 30% 390
Electricity 24% 312
Anodes 15% 195
Management & Labour 8% 104
Gas 2% 26
Chemicals 10% 130
Spares 8% 104
Overheads 3% 39
100% 1300
* 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.

–Stuart Burns

Comments (11)

  1. liquid coal says:

    Of course is the lingering external question of energy inputs for the gasification process. But it is when one adopts a more pragmatic view that the light of its desirability perhaps begins to shine through.

  2. Raffaele Fadda says:

    What will be the scenario if one of the big producer of primary aluminium will introduce a new technology and save the elctricity consumption by 25% ?


  3. stuart says:

    Clearly any cost reduction a particular producer manages to acheive would give them a significant advantage although in the short term it wouldn’t be beneficial for the process of rationaising production capacity. The industry desperately needs to close production capacity, mostly in China were a lot of the high cost capacity is located, in order for the industry to approach balance and producers to breakeven. Whilst we are always champions of lowest cost for consumers we recognise producers have to make a profit to maintain a viable industry. Do you know of some viable new production process that would alter the cost structure of the smelters? We would be fascinated to hear more.

  4. Lutec Australia Pty Ltd is building a new motor/generator (LEA) that will produce 250kW of electricity, couple four together and it will give 1 MW, couple 400 and get 100MW This technology has the capacity to reduce electicity costs by 80% plus! The LEA’s amplify the input from any source of electricity, nuclear,wind,coal,gas,hydro. Capital building cost is much less than coal fired power station building costs of 3.6 million USD MW.
    The LEA can reduce the carbon footprint and fuel stock useage by80% at the power station, and the same again again at the Alumina Smelter. Great for the envitronment and for the Aluminum and power industry. They need to be quick negotiations with China and three other Asian countries are underway, two Europeans are building proof of concept prototypes.

  5. Scott Allen says:

    This is really good information on aluminum pricing! It would also be beneficial to see this information based in the same manner as you did the steel model, i.e., unit pricing, factor (input volume), etc.


  6. Doug Heckert says:

    I’m trying to find an approx. price/cost to produce an aluminum can. I recently heard that recycling an aluminum can may save the approx. energy of the t.v. being played for 3 hrs. So I guess that I also need to know the ave. cost of running a t.v. for 3 hrs. I don’t doubt this clain since I heard it on the t.v. But my unbelieving friends question this. Please help me show that there may be some truth to this.

  7. Chris says:

    In the percentage and current cost table, is it $1300 per metric ton or short ton? Thank you.

  8. Mark Bahner says:

    Hi Stuart,

    This is great information! Do you have anything similar for secondary aluminum (aluminum from scrap)?

    I assume that the key components for secondary aluminum production would be:

    1) Scrap
    2) Natural gas
    3) Labor

    Maybe I’m missing something else…?

    Do you have any of this cost information for secondary aluminum? (I guess I’m particularly looking for labor costs, because I can calculate natural gas costs from energy efficiency and the cost of natural gas, and I can probably get scrap costs from recycling data.)

    Mark Bahner

  9. Hi Stuart,

    Very informative and interesting breakdown of Aluminum production cost data.
    I’m doing research works in this matter, but from different angle;
    Consider the following hypotheses:
    As the LME is the pricing norm, generally trending toward downside at least for the last couple of years, the production cost however does not reduce, moreover there is an upward trend due to the three principal elements of the cost:
    – Raw material prices increase over years
    – Electricity, and
    – Management& labor cost also follow the same pattern.

    Is there any database where I can get the trend of these three elements for the last decade? It can be presented per area of production.

    What about premiums from high grade product? what is the trend of prices in this segment?

    I’m interested to understand whether there is a possibility of increasing margins with this segment when LME prices fall under the acceptable limit for certain producers.
    Who are the customers of this segment? what volumes are exchanged annually?


  10. Hrithik says:

    Thanks for this great analysis and website.

    A quick clarification – in your cost breakdown, is gas natural gas? Is there any natural gas used to generate the electricity?

    My understanding is the electricity split in north america is 77-22-1-1 hydro-coal-natural gas-nuclear. (

    Thank you!

  11. Anupam Agnihotri says:

    what is the optimum size of aluminum smelter?

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