Alumina is the Elephant in the Room When it Comes to the Aluminum Price

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Some commentators were calling the imminent collapse of the aluminum price last month — certainly, it tested the bottom of its recent range, at just below $2,000 per metric ton on the LME.

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But the price has since rallied and is currently range bound between $2,000-$2,075, seemingly suppressed by a strong dollar and the general depression of commodity prices by fears of a trade war. Yet, it is supported by the net deficit position the Western world’s aluminum market has been in last year and this year.

One dynamic that has not featured greatly — but is fast becoming a major concern — is the alumina price.

As the precursor to aluminum, it is taken as a rough estimate that one ton of primary aluminum requires an input of two tons of alumina. According to Reuters, the cost of alumina has been in the high teens as a ratio of the price of primary aluminum. For example, with LME aluminum currently trading around $2,050/ton, alumina would be expected to be in the region of $370 per ton. This week it hit over $625/ton basis on the CME cash contract based on Australian alumina, putting immense pressure on smelters’ margins.

Why is that the case? The supply market has been facing a perfect storm of short- and medium-term disruptions.

Hydro’s Alunorte refinery in Brazil, the world’s largest, has been on an enforced go slow run rate of 50% of capacity since early this year. Hydro is reaching an agreement with the authorities to allow a resumption of production; even when all the permits are in place, it will take a month or more to get back to full production.

Although the U.S. authorities’ sanctions on Oleg Deripaska and his various entities, such as Rusal and En+ in April, were postponed until Oct. 23 many consumers are wary about taking supply from his companies. That hesitancy is increasing to outright refusal as the deadline approaches and no solution is forthcoming.

Meanwhile, a strike last month by 1,500 workers at two bauxite mines and three alumina refineries in Australia operated by AWAC (owned by Alcoa and Alumina Ltd) is adding tension to a market estimated to be approximately 10% in deficit.

Set these developments against a backdrop of reduced output from China due to environmental enforcement this year, and the rising tension is understandable. Reuters reports the province of Liaoning canceled five potential projects with cumulative capacity of almost 30 million tons last month due to environmental considerations. That move, in addition to further potential for more capacity curtailments over the coming winter heating season, is making the supply landscape look undeniably constrained.

Alunorte could be back onstream for the onset of the northern winter. The strike in western Australia is unlikely to continue beyond next month without an agreement being reached, so some issues will ease. However, so serious are supply concerns over Rusal and Chinese alumina supplies that Goldman Sachs is forecasting the price to average $2,300, $2,200 and $2,000 over three-month, six-month and 12-month periods, respectively, as price rises at the onset of winter ease during 2019.

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In the medium term, poor profitability at squeezed smelters will slow the start-up of new smelters, particularly in China, and potentially push the Chinese market into deficit alongside the rest of the world, supporting the case for firmer prices through the end of the decade.

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