Aluminum for delivery in three months added 1 percent to close at $1,814.50 a ton Friday on the London Metal Exchange after touching $1,824.15, the highest since April 29. The aluminum market will be in deficit this year by 1.3 million metric tons according to leading global producer United Co. Rusal.
China’s imports of bauxite, used to make the metal, dropped 14 percent in April, customs data showed last week. Indonesia, China’s main supplier in 2013, banned raw-ore exports in January.
From 2007 to 2013, Indonesia accounted for 60% of global exports of bauxite, a clay-soil mixture that is refined into alumina for use in everything from cans to car bodies, reports Xan Rice for Financial Times. Last year, China, the world’s largest producer and consumer of aluminum, imported about two-thirds of its bauxite from Indonesia, so the race is on to fill the void as demand grows, said Ian Levy, the chief executive officer of Australian Bauxite Ltd. (ABZ), which will open its first mine late this year.
“The number one beneficiary is Australia,” said Ivan Szpakowski, a Shanghai-based analyst at Citigroup Inc. China’s “inventories will run out eventually, and when we start getting into the fourth quarter of this year, and especially as we move into 2015, this will become a major issue,” he said.
Chinese demand will help spur a 34 percent jump in Australian bauxite exports to 16.8 million metric tons in the year ending June 30, the government estimates. Australia, which became the largest supplier to China in March, shipped 1.02 million tons to the country in April, customs data show. Chinese customs did not report any bauxite imports from Indonesia for April and shipments plunged 78 percent from February to 477,386 tons in March, the data show.
There are other signs that the Indonesian ban, which was designed to spur local industry, is now having an effect on Chinese producers. The cost of landing bauxite in a Chinese port has increased from a little more than $40 a tonne last year to $60 a tonne, due to the cost of bringing in ore from further afield, CRU says.
Aware of the looming supply crunch, some companies are seeking to secure new resources. China Hongqiao, a large aluminium producer heavily dependent on Indonesian bauxite, announced this month that it was looking to buy a mine in Africa. Guinea, in west Africa, has vast reserves. Xinfa Group Co. may build a $3 billion alumina plant in Jamaica that will also produce bauxite, according to the Jamaica Bauxite Institute.
For China, the challenge is not simply replacing the ore from Indonesia, but also finding new sources to keep up with its ambitious expansion plans for aluminium production. Wood Mackenzie, the consultancy, reckons that Chinese bauxite demand will increase by 30 per cent by 2018, and said in a note this month that the Indonesian ban “could be transformative to the global bauxite market in the longer term”.
“Just like with nickel, there is no alternative supplier of bauxite of a sufficient scale and quality to replace the Indonesia material,” an Asia-based metals trader told Financial Times. While a prolonged ban could instigate other countries to begin expanding their own aluminum operations, Indonesia’s actions will have a large effect on short- to mid-term supply. Unlike some other industrial metal suppliers, aluminum smelters and refineries are expensive and time consuming.
“From mid-2015 to late 2016 the market could find itself quite short of bauxite,” Nic Brown, head of commodities research at Natixis, said in the article. “If that happens you would expect the price of aluminium to go up.”
In HSBC’s Metals Quarterly Report for Q2 2014, the recent weak prices of aluminium have forced major facility shutdowns, which in turn may shift the market from surplus to deficit during this year. The global aluminium market may witness a global deficit of 144,000 mt in 2014. But the market may move back to 288,000 mt surplus by 2015.
The global surplus is likely to widen during 2016 and 2017. This is mainly on the back of expectations that delayed projects in India and Russia may become online during 2016-’17. The bank anticipates new production to the tune of 4 million mt coming out of new smelters in these countries as well as in Russia, Canada and the Middle East.
The bank has also lowered its demand growth estimates for the five-year period from 2013-2017 down to 5.5% from 5.7%. The average aluminium price for 2014 may remain at $1,887 per mt. The prices may move above $2,000 per mt by the end of the year 2014.