Photographer: Andrey Rudakov/Bloomberg

`Berserk' Aluminum Boom Signals Ore Bonanza for China's Quarry

  • Rio's $1.9 billion bauxite development set to be litmus test
  • Chinalco says looking at projects, including in Australia

Key aluminum ingredient bauxite is shaping up as China’s newest obsession in its mission to secure raw materials and once again minerals-rich Australia is a major target.

China’s investment in Australia’s mining industry plunged along with the global commodities rout, dropping in 2015 to the lowest since 2008 as surging supplies created gluts of materials including oil and iron ore. It’s a different story unfolding for bauxite, with a potential step up in interest led by Aluminum Corp. of China, known as Chinalco, which confirmed it’s looking at investing in projects in Australia.

Demand in China for the aluminum needed in air conditioning units to airliners will rise by almost a third by 2020, according to Morgan Stanley, while the nation’s supplies of adequate raw materials to produce the metal are dwindling -- spurring imports and encouraging new investments overseas in countries including Australia and Guinea.

“In China, the smelting capacity has gone berserk over the last 10 years,” but the nation doesn’t have the economic, long-term supplies of bauxite it requires, said Darryl Pilgrim, Sydney-based industry director for aluminum and alumina at researcher AME Group. China has scope to raise bauxite imports further “and Australia is the logical choice,” he said.

Rio Tinto Group’s $1.9 billion Amrun development on Queensland’s remote Cape York peninsula may prove a key litmus test of interest. The world’s second-biggest miner gave building approval in December, confirming there was “great interest” in sales talks from potential Chinese customers. On an earnings call last month, Chief Financial Officer Chris Lynch said that the company was looking at alternative ways to finance key infrastructure components of the project.

China is likely to turn to Australia for new sources of supply, particularly as weak commodities prices cut the costs of overseas deals, according to Bloomberg Intelligence analyst Yi Zhu. China Hongqiao Group Ltd. and Chinalco may be interested in investing in Amrun, said Helen Lau, an analyst at Argonaut Securities (Asia) Ltd. in Hong Kong. 

“It’s possible they may look to invest a little in the Rio project to get some long-term offtake agreements,” Lau said by phone. However, any investment wouldn’t be their major priority and they probably wouldn’t want a large stake, she said. Chinalco is the largest holder of Rio’s London-traded shares, according to data compiled by Bloomberg.

“Chinalco is looking for good investment opportunities globally, including bauxite projects in Australia,” the company said in an e-mailed response to questions. The company declined to comment on whether it’s had talks on taking a stake in Amrun, though said it has paid attention to the project’s development. A China Hongqiao official said it doesn’t need to invest in mines to secure supply. Rio declined to comment.

Biggest Producer

Australia, the world’s biggest producer of bauxite, lifted full-year exports to China by about a third in the 12 months to June 30, according to the Department of Industry, and a slate of projects are aimed at raising future output.

Bauxite is refined into alumina, an intermediate material that’s then run through a smelter to produce aluminum. China consumes about 54 percent of Australia’s resource exports, according to the industry department. Australia is the largest exporter of iron ore and coal to China.

China’s Xinfa Group Co. is backing a project near Rio’s Amrun, while Yankuang Group Co. has a potential development in Western Australia and Shandong Nanshan Aluminum Co. agreed in August to provide a project loan to finance construction of Gulf Alumina Ltd.’s Skardon River asset.

20 Days

By the end of the decade, new and large greenfield mines outside China will be required to feed Chinese needs, Australia’s Alumina Ltd., partner in the world’s biggest bauxite mining venture with Alcoa Inc., said in a February filing. China will use bauxite imports for 60 percent of its alumina output by 2030, compared with about a third of output currently, the company said.

Malaysia, which became China’s top supplier following Indonesia’s 2014 ban on raw ore exports, this year imposed its own three-month moratorium on bauxite mining and may extend the halt, according to BMI Research.

In Australia, “you can dig the material, put it in a stockpile and put it on a vessel and it can be in China within 20 days of having been mined, so it’s extremely quick,” said Simon Finnis, chief executive officer of Metro Mining Ltd., which is developing the Bauxite Hills project in Queensland and last year signed a sales pact with Xinfa Group, its third-largest shareholder. Gulf Alumina this month advised holders to reject a merger approach from Metro Mining.

While China’s demand for aluminum is rising, it’s still producing more than it needs and selling the excess overseas, and there’s no guarantee output will continue at the same volume over the longer term to sustain rising bauxite imports, Australia & New Zealand Banking Group Ltd. said in December. Primary aluminum output in China fell in the first two months of 2016.

China is showing signs of greater caution about investments in Australia. Cost blowouts and legal disputes have made Chinese investors more wary, according to Citic Pacific Ltd., which made the nation’s single biggest foreign resources investment in Australia with its disastrous $8 billion Sino Iron mine project. Baosteel Group Corp. and partners in December halted a planned A$5 billion ($3.8 billion) iron ore project in Western Australia.

Investments will be “more focused on value and on margin than on scale, as we had in the previous boom,” Adrian Prendergast, a Melbourne-based analyst at Morgans Financial Ltd. said by phone. “It’s going to come down to those few commodity markets where there are robust margins through the cycle” -- including bauxite, he said.

Special Report: China's Investment in Australia

— With assistance by David Stringer, and Winnie Zhu

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