Aluminum’s Even Crazier Kinsman

Prices of alumina are surging amid a worldwide shortage.

Photographer: Vincent Mundy/Bloomberg

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Think aluminum prices have been going crazy? Then check what’s been going on with alumina:

Call That a Price Surge?

Alumina's jump has left aluminum prices in the dust

Source: Bloomberg

Note: Rebased. Dec. 31, 2017=100.

Primary aluminum is made from feeding gritty white alumina -- an oxide refined from bauxite ore that’s essentially the same stuff as rubies and sapphires -- into electrical furnaces. And while the market for end-product metal has been tightening this year almost entirely as a result of tariffs and sanctions emanating from Washington, alumina has been running short of its own accord.

There are long-term and short-term factors at play. At the most basic level, years of rough balance between supply and demand seem to be finally running off the rails. Outside China, 2017’s robust growth in aluminum demand has outpaced the addition of new refining capacity. Within China, Beijing’s winter curbs on polluting industries have had the same effect, choking off supply from a refinery industry that’s overwhelmingly based in the cluster of provinces surrounding Beijing.

Tighten Up

Alumina production hasn't been keeping pace with aluminum output in recent years

Source: International Aluminium Institute

Note: For illustrative purposes, daily alumina output has been divided by two to represent aluminum content. It takes approximately two tons of alumina to make a ton of aluminum.

As a result, China’s deficit in alumina will go from the 100,000 metric tons to 300,000 tons that was forecast for 2017 to a 2.1 million ton to 2.5 million ton shortfall this year, according to Alcoa Inc., the biggest supplier to third-party smelters.

Short term, blame the U.S. Treasury and the Brazilian courts. United Co. Rusal, whose 7.7 million tons of alumina accounted for about one in every 15 produced globally last year, has been seesawing on the markets ever since Treasury Secretary Steven Mnuchin announced sanctions against the company earlier this month. The shares jumped as much as 38 percent in Hong Kong on Tuesday after a further statement allowed traders extra time to wind down existing transactions with the company, raising prospects of a resolution.

Precious Jewel

Alumina prices have cleared $500 a metric ton

Source: Bloomberg

In Brazil, Norsk Hydro ASA’s Alunorte refinery -- which pumped out 6.4 million tons of alumina in 2017 -- is running at reduced capacity after a local court started examining claims it had polluted a tributary of the Amazon. A decision in that case could still be weeks away. Put those two together with the 8.2 million tons that’s affected by China’s smog controls and you’re talking about almost a fifth of global supply in jeopardy.

As Gadfly has argued before, these political risk factors could go away or persist, making them supremely difficult to predict. But there’s reason to think that alumina’s surge might be more persistent.

Watch Out

A huge slice of the world's alumina production is threatened by Chinese output curbs or government action in the U.S. and Brazil

Source: Bloomberg, Bloomberg Intelligence, Statista, company reports, International Aluminium Institute

Note: "At risk" doesn't mean the entire volume of production may be taken offline.

For one, prices for bauxite on the global market could be seeing upward pressure as bulk freight rates climb and India starts smelting more of its own aluminum. Those of caustic soda, another key ingredient in alumina refining, are already at record levels. 

Meanwhile, on the other end of the supply chain, Chinese smelters can afford to pay more, so refiners need not end up eating all that cost. Even smelters dependent on more expensive grid electricity have been making some of the best profits in five years over the past 12 months, according to Bloomberg Intelligence.

Golden Age

Chinese aluminum smelters have been enjoying some of their best prices in five years

Source: Bloomberg Intelligence

Note: Calculations based on use of domestic alumina supply. Captive power describes smelters with their own power stations.

That’s reason to take a good look at alumina, and the companies like Alcoa and its joint-venture partner Alumina Ltd. that are most weighted toward production and away from the downstream smelting industry.

In a time of turmoil in aluminum markets, metal is bending all over the place. Alumina, on the other hand, is made of harder stuff. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at dfickling@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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