Operating costs at bauxite mines driven down by falling fuel prices and strong US dollar

The world average bauxite mine site cost fell for the third consecutive year in 2015, decreasing by 8.0 per cent. The strong US dollar and weak energy prices have been the key drivers of cost deflation in the bauxite mining industry. As most of the revenues for third party bauxite mining companies are in US dollars while costs are in domestic currencies, any depreciation in domestic currency offers a cushion to companies in terms of cost benefits. Bauxite miners have also benefited from weak energy prices, which have lowered their operating costs.

Strong US dollar has a great impact on bauxite mining site costs

Exchange rates have a great impact on labour costs, which was the largest cost component of bauxite mining costs in 2015, accounting for 24.1 per cent of the world average site cost. The chart below shows a national hourly labour cost index in major bauxite mining countries between 2012 and 2018.



Hourly wage rates, expressed in US$ terms, in Brazil and Russia have experienced a rapid decline between 2012 and 2016, falling by 22.3 per cent and 30.1 per cent respectively in 2015 alone.

As one of the major bauxite producing countries in the world, bauxite mining companies in Australia have been significantly affected by the exchange rate of the Australian dollar. The Australian dollar fell by 17 per cent against the US dollar in 2015. The outlook remains bearish due to diverging monetary policies, as well as the relative strength of the US economy compared to the resource-driven Australian economy.

On the other hand, the devaluation of Chinese currency has eased the rise in US dollar wage rates in China, as wage rates in local currency terms have increased at a rapid rate since 2012. CRU expects wage rates at alumina refineries in China to remain stable in 2016.

CRU's bauxite cost model allows the user to perform quick and easy exchange rate scenarios. A scenario assuming a US dollar appreciation of 20 per cent results in a 6.0 per cent decrease in the world average site cost. A 20 per cent depreciation increases the world average site cost by 8.9 per cent.

Future outlook for bauxite costs

CRU expects the decrease in bauxite mining site costs to continue in 2016, falling by 9.5 per cent compared to 2015 levels. This fall is due to decreases in all cost components with the exception of maintenance and consumables costs, which are expected to remain largely unchanged. The increase in the world average realisation cost at bauxite mines in 2016 is expected to be considerably more moderate than in 2015, rising by 7.4 per cent largely as a result of increased ocean freight rates. Business costs are therefore expected to decrease in line with site costs, falling by 7.2 per cent in 2016.