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Trade Review: Alumina stumbles despite commodities, aluminum boom

Highlights

More longs than shorts

China accelerates output, slashes imports

Record high freight rates to drive Q2 price

Sydney — As the journey into the second quarter begins, record high freight is impacting alumina prices. Traditionally, as freight rates increase, they tend to weigh on FOB values, and FOB Australia alumina has been under downward pressure since early March.

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But for a large part of Q1, alumina prices were rangebound, with FOB Australia gyrating tightly between $303/mt and $307/mt in January and February. Consumers and producers sparred bitterly over price then, each nursing outlooks based on differing factors that pressured prices in opposite directions. Only in March did the battle reach a verdict, and the market clearly took a bearish turn.

Consumers were certain the price of alumina had to fall, on account of ample unplaced cargoes in Australia, and the substantial decline in Chinese interest. China accelerated the growth of its alumina output over January and February, increasing 14.8% year on year to 12.64 million mt, according to data from the National Bureau of Statistics. Additionally, the growth in China's alumina production during the period, far surpassed the growth of its aluminum output of 8.4% year on year to 6.45 million mt.

This led China to slash its alumina imports by 29% year on year in January and February to around 490,000 mt in total, data from the customs office showed, as domestic tons were readily available and cheaper.

Typically in a long global market, alumina market participants do not expect the price of Western alumina to stray far from China's domestic prices. This is because historically, China is technically self-sufficient in alumina and can be quick to pare down local production once the arbitrage window opens for imports.

Australian alumina is trading at premiums of $14.50/mt and Yuan 95/mt to Chinese tons, in import parity terms. A number of consumer and trade sources think the premium should not reasonably exceed Yuan 60/mt (around $9/mt).

However, despite the supply overhang, a notable number of market participants said they consider alumina to be undervalued relative to the price of aluminum on the LME. Between January and February, the price of Australian alumina averaged around 14.6% of three-months LME aluminum. The percentage tumbled to circa 12% by the end of March, where it remains to-date in April.

The prevailing low percentages have not been observed in over a decade. Term contracts for 2020 averaged between 16.5% and 17%, and a number of contracts for 2021 were priced between 15.5% and 15.8% of the LME.

Certain market participants are of the view that the percentage is unlikely to remain at current historical lows for an extended period, as the outlook for aluminum is strong.

LME ALUMINUM AT THREE-YEAR HIGH

Commodity prices, aluminum included, are in the midst of a boom, riding high on massive stimulus spending by governments.

Along with infrastructure spending, governments across the world have pumped trillions of dollars into their economies, while central banks have slashed interest rates. Consequently, financial markets fueled by easy money have attracted a rush of investors, sending prices higher.

The LME three-months price is currently trading at a three-year high, and far above its pre-COVID-19 pandemic levels. A number of market participants said they see the rally lasting for an extended period, while others expect high aluminum prices to cushion alumina prices from hard falls.

The general expectation among alumina market participants is that a global economic recovery will likely boost demand for primary aluminum.

Alcoa's chief Roy Harvey said during an earnings presentation on Jan. 20 that the company was expecting global aluminum demand to grow 7% year on year to about 67 million mt in 2021. He said the anticipated 7% growth in consumption represented the highest year-over-year increase since 2014.

Harvey also said the strong market sentiment would be boosted by demand in all key end-markets including infrastructure, ultra-high voltage electrical systems, packaging, machinery, passenger vehicles and new energy vehicles.

FREIGHT RATES EXPLODE

The commodities boom has also driven ocean freight rates to historic highs.

As prices and demand for commodities like aluminum, coal and grain climb, demand for cargo transportation strengthens.

It costs about $43/mt to ship a 30,000 mt alumina cargo from Western Australia to Lianyungang in China, based on loadings from both Bunbury and Kwinana, and a discharge rate of 6,000 mt/day at Lianyungang. The assessment began the year at $21.70/mt, Platts data showed.

The spike in freight pulled FOB alumina values down, as it caused the landed price of shipments into China to surge. Traditionally, as freight rates increase, they tend to weigh on FOB values, and the FOB Australia alumina price has been under downward pressure since early March .

"[The] freight market is tight...If you don't have a vessel booked, it's getting extremely difficult to find vessels willing to perform on the lift," a market source said in late-March. "Freight market is wild right now. Taken China out of the market completely".

With numerous conflicting bullish and bearish factors active in the market, alumina may be poised for a bumpy ride during Q2.

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 metallurgical coal, iron ore, scrap and alumina. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.