Bauxite and alumina: Consolidation on the cards?

Bulk commodity producers have continued to struggle during the early stages of 2016, even with efforts made to cut costs, noted a recently published report on global Metallurgical Bauxite & Alumina market. With low bauxite and alumina prices expected to persist and demand from China remaining low, there may be a number of distressed assets coming onto the market throughout 2016, many with the potential for closure, according to the report which has forecasts till 2026.

During challenging market conditions, there is often a trend towards restructuring and consolidation of ownership. There is every possibility that 2016 may be particularly eventful for the aluminium industry, a year that has the potential to be defined by a large reorganisation of the corporate landscape.

Previously in February 2011, Norsk Hydro shook the industry with the US$5.3Bn purchase of aluminium producer Vale's Brazilian bauxite, alumina and aluminium assets that also included agreements for Vale's share in production from the Mineração Rio do Norte (MRN) 18.1Mtpy bauxite mine at Trombetas.

Five years on from Norsk Hydro's acquisition of Vale's Brazilian aluminium assets and the landscape in the industry looks to be changing once more. In 2015, China was responsible for just under half of the world's alumina production of 112.7Mt and a little over half of global aluminium output. The alumina and aluminium industries remain in a state of oversupply, as output has outweighed demand from primary aluminium production.

Weak demand for alumina amid prices languishing in the region of US$210/t CIF China in mid-January 2016, have led to capacity cut-backs and permanent closures of alumina refineries and aluminium smelters. This has affected large, integrated aluminium producers including both Alcoa and Rusal.

In early 2016, Alcoa announced that it would cut the remaining 810ktpy of refining capacity at its Point Comfort facility, placing it on care and maintenance. Following this, the company would have globally idled or closed 3.3Mtpy of alumina refining capacity.

In the meantime, on 28 September 2015, Alcoa revealed that in the second half of 2016, it would separate into two independent, publically-traded companies.

Rusal has previously taken steps to curtail capacity at its least efficient alumina refineries. Operations are currently idled at the Alpart refinery in Jamaica and the Eurallumina refinery in Italy. The company's Friguia alumina refinery in Guinea has been idled since 4 April 2012.

Another indicator of the state of the industry was the announcement in January that Glencore-owned Sherwin Alumina Company had filed for Chapter 11 bankruptcy. The following month, Noranda Aluminum Holding Corp filed for voluntary bankruptcy protection.

With market conditions at present remaining challenging across a range of commodities, there may be attractive investment opportunities which might involve some of the biggest names in the business. Some of the largest mining companies could be shaping up to complete substantial company-changing takeover deals, which once again would change the face of the industry.