China alumina spot market activity increases on inter-province arbitrage, winter stockpiling

Spot trading interest in the Chinese domestic alumina market has jumped in the past two weeks, led by recent winter stockpiling activity, pandemic-related transportation restrictions and air pollution warnings amid the winter heating season.

Sources in China have observed an increase in inter-province arbitrage activity, involving vertically integrated aluminum enterprises swapping alumina origins for sales to their customers while purchasing other alumina for delivery to their affiliated smelters, further driving activity in the spot market.

These enterprises were selling alumina from Henan instead of Shanxi to traders for delivery to smelters within Henan. At the same time, they were buying spot Shanxi alumina for delivery to their co-owned or affiliated smelters in the northwestern regions of Xinjiang and Inner Mongolia, they said.

Alumina produced in Shanxi and Henan are both typically considered to be of northern origin, but the key difference is that Shanxi is in geographical proximity to smelters in the northwest, while Henan has more net demand for alumina due to a relatively larger smelting capacity compared with Shanxi.

Pandemic-related transportation restrictions have also broadened the delivery cost gap between Shanxi and Henan to northwestern smelters, leading to a wide price arbitrage between the two origins on a delivered basis. This could have a substantial impact on transfer pricing margins for integrated aluminum enterprises in particular, sources added.

Close to 70,000 mt of Shanxi alumina has been traded on a spot basis Dec. 5-7 so far, S&P Global Commodity Insights calculations showed based on information from China-based market participants.

Spot deal prices were ranging Yuan 2,880-2,940/mt ex-works Shanxi at various volumes for delivery to northwest China, while a 5,000 mt spot deal was done in Henan at Yuan 2,960/mt EXW for delivery to a smelter within the province.

The Platts China domestic alumina daily assessment stood at Yuan 2,900/mt ($415/mt) EXW Shanxi on Dec. 7, up Yuan 30/mt on the day, according to data from S&P Global.

Domestic prices in Shanxi marked increases starting from Yuan 2,730/mt EXW levels in the week of Nov. 21. The previous rally in Shanxi was recorded in early August with the last high at Yuan 2,910/mt EXW. Since then, prices were falling gradually until that week.