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Trade Review: Alumina prices to be supported in Q1 by output cuts, high energy prices


Supply concerns on disruption at Australian alumina unit

Refineries in the Atlantic region face operational risks

Southeast Asian premiums, China's import arbitrage key

  • Author
  • Jenson Ong
  • Editor
  • Anthony Poole
  • Commodity
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  • Metals Trade Review

Alumina markets globally are likely to be supported in the first quarter by ongoing supply disruptions in Australia and high energy prices amid the Russia-Ukraine war, while a recovery in aluminum demand remains uncertain and depends on the degree to which China is able to resume and sustain operations after easing COVID-19-related restrictions.

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Australia implemented a ban on alumina exports to Russia in March 2022 amid the war in Ukraine and market sources have said that any amendment to this policy will lead to significant price moments in Q1 and likely the rest of the year. The supply surplus following the ban had already been priced in by Q4 2022.

In 2022, Australian alumina peaked at $533/mt FOB in the second half of March amid production issues in Australia and output cuts in China amid the Beijing Winter Olympics. Levels fell below $400/mt FOB about two weeks after Australia's export ban kicked in.

Australian alumina prices are likely to be supported in the short term by disruptions at Alcoa's Kwinana Alumina Refinery in Western Australia. The refinery announced Jan. 9 that production had been cut by about 30% due to a gas shortage.

"As it stands, force majeure is not off the table," said a source from Alcoa's global sales and marketing team.

A western trader said that if the refinery sees an outage of even over a week, "it will swing the global alumina market to a small supply deficit from a small surplus and support an increase in prices."

Platts assessed benchmark Australian alumina at $345/mt FOB Jan. 11, up from around $310/mt FOB over a large part of Q4 2022 which were the lowest levels for the year.

Chinese import arbitrage window

The theoretical arbitrage window for importing Australian alumina into China -- open since late Q4 2022 -- could narrow in Q1 if Australian spot prices continue rising, market sources said.

The arbitrage window was open as of Jan. 12 as the Yuan continues to strengthen against the dollar amid China reopening after easing COVID-19 curbs while freight costs to import into the country have declined. The window may remain narrowly open in the near-term as alumina prices in China are likely to be rangebound throughout the Lunar New Year period.

Prices in China rose to Yuan 2,955/mt ($430-$435/mt) ex-works Shanxi as of Jan. 11 after peaking at Yuan 3,310/mt EXW in the north in mid-February 2022, and then falling to a 2022 low of Yuan 2,725/mt EXW in mid-November.

However, spot buying activity from China has been weak so far this year amid mixed expectations of further increases in domestic alumina prices.

Chinese sources said that the easing of COVID-19 controls are yet to have a materially stimulating effect on aluminum end-user demand. The seasonal decline in demand over Christmas-New Year has extended through to the early Lunar New Year this year -- over Jan. 21-27 compared to the usual period in February -- sources added.

Chinese market participants said they now expect more clarity across the domestic aluminum markets in February, after the festivities, with much depending on the trajectory of the pandemic in the country.

Southeast Asian premiums

The trend of Southeast Asian alumina prices being at elevated premiums to Australian product is likely to continue in Q1 if the trade implications of the Russia-Ukraine war remain in place, market participants said.

China and Southeast Asia had turned net alumina suppliers to Russia with volumes from Australia and Ukraine having been cut indefinitely. Southeast Asian-origin alumina is also beginning to attract higher premiums due to relative end-destination flexibility of the cargoes after Australia's export ban to Russia, market participants said.

The premiums for Indonesian alumina -- considered a key indicator of Southeast Asian prices -- have historically been equivalent to freight savings for delivery to major destinations compared to product of Australian origin.

However, the 2023 term contract volumes from Indonesia will be sold at twice the previous premiums of $8-$12/mt to Australian benchmark spot prices, sources familiar with the negotiations said.

"The premiums for our 2023 alumina contracts will be at a historical high, which underscores the strong demand picture for alumina globally," a source from Indonesia's first smelter-grade alumina refinery told S&P Global Commodity Insights. "We are sold out for 2023 volumes," the source added.

Out of Vietnam, spot tenders in November and December 2022 settled at premiums of $15-$20/mt over spot Australian prices at the point of award, with the elevated levels expected to continue in Q1.

Energy security, operational challenges

As trade flows from the Asia Pacific to the Atlantic basin remain active, market participants said they will also monitor developments in other key regions worldwide that may indicate a change in fundamentals.

The operations at Alcoa's San Ciprian alumina refinery in Spain will depend in Q1 on energy costs that remain at elevated levels after the Russia-Ukraine war. Sources said it was unclear if this would impact the split between smelter-grade and chemical-grade alumina in the plant's output.

"We are currently not running any smelter-grade production there," an Alcoa source involved in its global alumina operations told S&P Global Dec. 29, 2022. "We are running at just about 50% capacity, but it is all for chemical grade customers."

The Jamalco refinery in Jamaica, as well as the Mozal and Alumar smelters in Mozambique and Brazil, respectively, will also be keenly watched by seaborne alumina market participants for any potential impacts of high energy prices and operational risks.

Sources said that the aluminum value chain will be subject to volatility unless energy costs stabilize after the peak winter demand period in Q1, and support steady aluminum metal prices.

In France, Aluminium Dunkerque has restarted some of the pots at its Dunkirk smelter that were idled in September, sources close to the matter told S&P Global Jan. 10.

"You're still better off producing, we have to sell these little units in the form of P1020, and it makes sense with the current prices of power," the sources added.