Strong USD, weak fuel prices and bauxite barter lead to lower operating costs at alumina refineries

CRU's recently published Alumina Cost Service, 2016 Edition examines the key themes which had a significant effect on the alumina industry in 2015, including the main drivers behind the significant decrease in world average site costs. Three key themes emerged as particularly notable, including the impact of falling fuel prices, the continued strengthening of the US dollar and its effect on alumina costs in US$ terms, and the changing dynamics of bauxite sourcing in China.

Fuel costs, which include oil, gas and coal consumed during the digestion, precipitation and calcination stages of the refining process, are the second largest contributor to site costs at most refineries, comprising 19.9 per cent of the world average site cost in 2015. Although the amount of fuel used in the production of a tonne of alumina certainly plays a part in determining fuel costs, fuel consumption tends to be a very stable factor showing little change from year to year, barring any major technology changes at a refinery. The key driver of changes in fuel costs at a refinery is fuel prices, and the correlation between the two is typically very strong.

Although the world average fuel price paid by alumina refineries has been declining since 2012, the 25.1 per cent fall in fuel prices in 2015 is largely unprecedented, surpassing even the fall in fuel prices seen during the 2009 global financial crisis. The decrease was largely driven by the collapse in both oil prices and natural gas prices, though a smaller decrease in coal prices also contributed to the fall.

Europe and North America were two of the regions which saw the largest decrease in the average fuel price paid by alumina refineries between 2014 and 2015, falling by 37.7 per cent and 36.5 per cent respectively.

Coal prices in China have significantly declined in recent years, down 53.2 per cent between June 2011 and May 2016. CRU expects domestic coal prices in China to remain low due to the economic slowdown in the country.

Depreciating currencies lower costs in US$ terms and China's changing bauxite sourcing pattern have also weighed heavily on operating costs at alumina refineries worldwide.

Following the decrease in the world average site cost in 2015, CRU forecasts that site costs at alumina refineries will fall once again in 2016, decreasing by 5.7 per cent. This is driven primarily by a further fall in the average fuel cost, as oil and gas prices remain under pressure, as well as a decrease in the world average labour cost. After 2016, the average site cost is expected to rise moderately over the medium term.