A crisis is brewing in the aluminium supply chain as shortages drive the price of the metal’s critical ingredient, alumina, to an all-time high of $645 a ton, close to double the $330/t at the end of last year.
Chinese aluminium producers, which are increasingly reliant on imported raw materials, are facing the tightest squeeze with the short-term alumina price rocketing up in the past week.
Alumina, also known as aluminium oxide, is the mid-point in the three-stage process of making aluminium which starts with mining bauxite ore which is refined into alumina that is then smelted into aluminium.
Two problems on different sides of the world are squeezing the first two stages of the aluminium supply chain.
In the west African country of Guinea, the world’s primary source of seaborne traded bauxite supplying 70% of China’s imports, shipments by a major producer have been suspended because of a dispute with government customs officials.
In Australia, another big producer of bauxite and alumina, exports of both have been slowed because of tighter government environmental laws and tight supplies of natural gas.
Alcoa, a U.S. company, is closing the oldest of its three alumina refineries in Australia, while a refinery owned by the British miner Rio Tinto has declared force majeure (cannot deliver) due to the gas shortage.
Those events are occurring as demand for aluminium strengthens with global production reported to be close to an all-time high.
Morgan Stanley, an investment bank, told clients late last week that stresses in the aluminium supply chain were accelerating with China facing domestic bauxite supply challenges as well as the threat to imports.
Citi, another bank, entered the alumina/aluminium debate yesterday with a comment that “supply disruptions continue to roil aluminium’s raw material market which should support the aluminium price”.
A significant effect on aluminum is yet to be noticed on metal markets though a 2% rise late last week to $2587/t was attributed to the suspension of shipments by Emirates Global Aluminium which accounts for 13% of Guinea’s exports and 3.6% of global supply.
Morgan Stanley said bauxite supply is historically under-researched with the suspension of some exports from Guinea “highlighting the world’s growing dependence on Guinea”.
Declining Ore Grade
China’s own bauxite mining industry is under pressure from declining ore grade as well as tighter safety and environmental regulations, similar to those affecting Australian supply.
“This leaves Guinea as the key driver of current and future bauxite supply, unless something changes,” Morgan Stanley said.
“Guinea now accounts for 70% of China’s bauxite imports, with China’s overall bauxite imports at a record high.”
Citi said the alumina price rally showed no signs of slowing with the price on the Shanghai Futures Exchange hitting a record high in intraday trading of $645/t.
“Due to concerns about Guinea bauxite supply, the alumina-to-aluminium price ratio has hit a six year high,” Citi said, adding that many aluminium smelters were sheltered from the higher price by long-term alumina supply contracts.
Balancing the three stages of the aluminium industry has always been tricky with problems more frequently occurring in the refining and smelting phases because of their high rates of energy consumption.
Bauxite, the simplest part of the process, rarely causes problems because it is a simple, near-surface ore to mine.
But what’s happening today is warning that tougher environment controls and heavy reliance on a single major supplier of seaborne material is introducing a fresh layer of risk in the aluminium supply chain.