China achieved a record-high production of primary aluminium, reaching 3.65 million tonnes in May 2024, comparable to output levels seen in August and September of the previous year. This surge is bolstered by the restarting of smelters in Yunnan after a prolonged shutdown, promising an annual output of 43 million tonnes. However, this upward trajectory has significantly affected the alumina market, the key raw material for aluminium production, resulting in constrained supply and fluctuating ore prices.
Throughout May 2024, China's average alumina price surged, recording a growth rate of 13.24 per cent. According to the Shanghai Metals Market, the domestic alumina price increased over a month from RMB 3,451 per tonne to RMB 3,908 per tonne, reaching its highest level in over two years.
Besides primary aluminium production growth, Rio Tinto's force majeure on third-party contracts for alumina exports from its Queensland refineries also played a critical role in causing China's volatile alumina prices in May. Earlier in January, bauxite supply concerns from Guinea also led to China's domestic price hike, taking it to RMB 3,354 per tonne as of January 27.
The SHFE alumina contract, newly launched last year, was also frantic in May, rising above the RMB 4,000 per tonne mark. Currently, it is trading below the spot physical market at RMB 3,800 per tonne.
Alumina supply constraint
Domestic alumina supply struggled to keep pace with the increasing demand for primary aluminium production, highlighting a disparity between the growth rates of alumina production and primary aluminium output. While primary aluminium production during January-May 2024 increased by 5.54 per cent, alumina output grew by 3.4 per cent, according to the Shanghai Metals Market survey.
This mismatch inevitably reflected an impact on domestic alumina price and Shanghai Futures Exchange (SHFE) contract. While the former rose by 24 per cent through the first five months, the latter grew by 3.5 per cent.
A weak bauxite supply chain impacting alumina production was also a reason for higher aluminium ore pricing. Environmental inspections caused many domestic bauxite mines to suspend operations early this year, hindering alumina production growth.
To compensate the dearth of domestic bauxite, China had to increase its reliance on imported bauxite for alumina production, which made the domestic pricing increasingly sensitive.
China also stepped up alumina imports to offset stringent domestic supply of the ore for primary metal production. From January to May, China imported 1.15 million tonnes of alumina, up by 60 per cent over a year.
However, the transaction was two-way, as China simultaneously exported alumina to Russia. Chinese alumina producers increased exports to Russia from 1,750 tonnes in 2021 to 1.12 million tonnes in 2023. So far this year, China's exports to Russia stood at 610,000 tonnes, up by 46 per cent from the corresponding period of last year.
The growth rate of Chinese alumina prices should abate by the end of the year as Yunnan's smelters will complete their restarts. But the sustained rally of alumina pricing this year suggests an overall unpredictable supply dynamics of aluminium's raw materials.
Analysts at Macquarie expect an alumina supply surplus in the third quarter, albeit a marginal surplus of 220,000 tonnes over 2024 as a whole.
The Chinese aluminium market had no reason to worry much about domestic raw material supplies in the past, but now it is increasingly depending on imported inputs, which indicates a new vulnerability for the world's largest aluminium producer.
