Global alumina prices likely to stay bullish through 2018 on supply disruptions and tight market

The price of alumina could hit another record high before the end of the year as supplies become increasingly tight with one after another happening disrupting the smooth supply of the key raw material.

Spot alumina price saw some unprecedented highs in 2018 first half and doubled to about $700 per tonne as the market showed panic reaction to U.S. sanctions on Rusal in April. The supply scenario was disrupted by two major happenings. First, the fifty per cent capacity closure in Hydro’s Alunorte refinery in Brazil in March on the issue of bauxite residue pond leakage followed by US sanctions on Rusal.

Graham Kerr, mining group South32’s chief executive, said the disruption showed no signs of easing as the market would face another supply scarcity when China will start the second year of environmental capacity cut in the country in winter season. The market is already concerned with workers at three refineries in Australia, part owned by Alcoa are on strike. The walk-out by union workers at the refineries has injected yet more uncertainty into an already problematic supply equation.

“The market will continue to remain tight,” Mr Kerr said. Alumina was quoted at $626 a tonne on Tuesday.

The tight alumina market is pushing up costs for global producers of the lightweight metal in 2018 keeping aluminium prices high. Most of the aluminium producers with their own alumina refineries are earning profit, while aluminium makers that buy alumina are under pressure due to cost increase.

As quoted in Reuters, the CME cash contract, indexed against Platts' assessment of the Australian price, currently stands at $626 per tonne, just shy of the record $643 seen at the start of May. According to Shanghai Metals Market, in China average spot alumina prices are at RMB 3302 per tonne or about US$ 482 per tonne, the highest since December 2017.

The looming deadline for the lifting of sanctions on Russian producer Rusal is approaching fast. Rusal supplies about 11 per cent of the world’s alumina, with plants in Ireland, Jamaica and a 20 per cent stake in Rio Tinto’s refinery in Queensland, Australia. Its customers have a deadline till October 23 to complete existing deals with Rusal.  No company can agree new contracts beyond that date unless sanctions are lifted. Rusal’s parent company is negotiating with the US Treasury to free itself from the sanctions; however, it is not clear if the sanctions will be lifted.

Last week, Norsk signed two agreements towards restarting of operations in Alunorte. But in order to resume full output at the 6.3m tonne a year alumina refinery, Hydro needs a Brazilian court to lift the five production embargoes.

Mr Kerr said it would still be “difficult” for the Alunorte refinery to return to full production this year. Commenting on China’s seriousness about winter capacity cut, he said that “The blue-sky policy is real.”

South32 is left with 3.2m tonnes of alumina, after supplying its own refiners and smelters, the 78 per cent of which it sells against an index price compiled by S&P Global Platts.

Edward Sterck, analyst at BMO Capital Markets said that “…the ongoing suspension of Norsk Hydro’s Alunorte and now the strike at Alcoa’s refineries in Western Australia could be pushing the global alumina market towards a 10 per cent deficit.”