Trade Review: Alumina market braces for downward pressure in late Q1 from new refining capacity, smelting cuts

This report is part of the S&P Global Platts Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, alumina, steel and scrap, and metallurgical coal. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Alumina prices face further downward pressure later in the first quarter, after a rapid decline from a peak in late October 2021, as more refining capacity comes online in the Pacific while smelting operations in Europe remain challenged by spiraling energy prices.

Western Australian prices tracked Chinese domestic alumina closely in Q4 after surging in late Q3 on the back of disruptions in the Atlantic, power restrictions in China and a rise in manufacturing costs.

The Platts Australian alumina daily assessment reached a three-year high Oct. 22 at $484/mt FOB before plunging 29% to $345/mt FOB Dec. 31, while the Platts Shanxi daily alumina assessment tumbled 32% from a record high of Yuan 4,120/mt ex-works in late October to Yuan 2,820/mt ex-works Dec. 31.

Alumina prices were above 15% of London Metal Exchange aluminum values for much of Q4 before falling to 12%-14% in December.

Market participants are now keeping a close eye on energy and environmental policies in China ahead of the Beijing Winter Olympics and Lunar New Year, as well as the potential fallout from smelting cuts in Europe due to high energy prices.

The Atlantic market grappled with supply disruptions in Q3, including a fire at the Jamalco refinery in Jamaica, damage to a bauxite unloader at the Alumar refinery in Brazil and a planned curtailment at the Noranda refinery in Louisiana due to Hurricane Ida in the US.

Production at the Alumar and Noranda facilities had returned to normal by December, and a three-stage resumption model for Jamalco had been announced, easing supply concerns in the Atlantic. The Platts Brazilian alumina premium to Australian tons fell more than 50% over the quarter.

Market consensus in China in early Q4 was that domestic prices would continue to rise on the back on surging input costs for caustic soda and coal, and soaring aluminum prices were expected to support demand for alumina.

But the tide turned when the National Development and Reform Commission on Oct. 19 proposed interventions to stabilize coal prices ahead of winter, lowering production costs for domestic alumina prices.

Aluminum prices on the LME and Shanghai Futures Exchange promptly tumbled from more than 10-year highs.

"Many Chinese buyers frontloaded purchases earlier when prices seemed like they were not going to stop increasing, which also contributed to easing demand in the later part of Q4," a producer based in China said.

Demand for alumina in China did not see a robust recovery in Q4 as domestic smelters were largely unable to resume idled capacity due to China's "dual control" policies on energy consumption and intensity.

China's smelters reduced primary aluminum output by 3.8 million mt/year, while only 450,000 mt/year of new capacity was added in 2021.

In Western Australia, the first standard spot cargo traded in Q4 to report a decrease in price was reported Oct. 25 at $479/mt FOB, followed swiftly by another deal at $450/mt FOB Oct. 29, and marking the beginning of a protracted decline.

"With Chinese buyers on the sidelines waiting for domestic prices to fall further, it is no surprise that WA prices started falling as well, as overall demand for spot cargoes had definitely softened," a trader based in Asia said.

Several European aluminum smelters were seen to reduce output or halt production entirely in Q4, fueling expectations of easing demand for alumina in 2022.

Norsk Hydro is the latest aluminum producer to announce a reduction in output due to high energy costs, with production at its 175,000 mt/year Slovalco facility in Slovakia to be cut to 60% from end-January.

Hydro's announcement followed a series of planned curtailments at smelters across Europe, including San Ciprián in Spain, Alro in Romania and Aluminium Dunkerque in France, with many citing high power costs as the primary reason.

However, the Atlantic market was split on whether the smelting cuts would impact the spot alumina market in Q1.

"It would not yet be fair to say that the market has fallen to $330-$340/mt FOB" due to smelting cuts in Europe, a consumer in Asia said, adding that $345/mt FOB remained a reasonable price Jan. 5.

"I do think the impact of the European smelting cuts would be immediate, with more cargoes being made available in the market due to the fall in demand from the Atlantic," another trader based in the Atlantic said Jan. 6, adding that tradable values would inevitably decline to $330-$340/mt FOB due to the situation in Europe.

Another consumer based in the West said Jan. 6 that WA spot alumina prices "were low as a percentage of LME, but could also be seen as high as energy prices are softening after winter," and thought that the fallout from the smelting cuts in Europe would likely soften WA prices and the Atlantic differential "later rather than sooner" in 2022.

#Alumina prices face further downward pressure, as more refining capacity comes online in the Pacific while smelting operations in Europe are impacted by spiraling #energyprices. #TradeReview: https://t.co/SzFf4bXUbz
Vote: Do you think alumina prices will end Q1 lower than Q4?

— Platts Metals (@plattsmetals) January 12, 2022

New refining capacity

A slew of new refining capacity in expected to start up in late Q1 across China, Indonesia and India.

In southern China, the Bosai and Tiangui refineries are set to commission their first and second phases of alumina output respectively, for a total production capacity of 3.6 million mt/year and 1.7 million mt/year. The Wenfeng refinery in northern Hebei province is expected to commission 2.4 million mt/year refining capacity, although sources said the timeline could be deferred to Q2.

In Indonesia, the Well Harvest Winning refinery in Kalimantan and Bintan Alumina refinery in Riau, each with 1 million mt/year of new capacity, have postponed their timelines for commercial sales to 2022 due to the pandemic. Well Harvest Winning refinery is now expected to commission its new capacity by March and Bintan Alumina in late Q2.

In India, commercial sales from the 1.5 million mt/year Anrak refinery in Visakhapatnam is slated to commence in Q1.

Alcoa has announced the restart of curtailed smelting capacity at Alumar in Brazil and Portland in Australia, with 268,000 mt/year and 35,000/year of idled capacity each, for H2, while Russian primary aluminum producer Rusal has started test production at the first phase of its new low-carbon Taishet Aluminium Smelter in Siberia, with a target to produce 428,500 mt/year of low-carbon aluminum.