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Trade Review: Alumina widens disconnect with aluminum prices as buyers stand back

Highlights

Aluminum rides stimulus boom

Alumina grapples with excess supply

High freight rates, rising China output slashes imports

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.

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Alumina prices are expected to lag aluminum in coming months, after significantly falling behind a surge aluminum prices in the second quarter, as more production capacity comes online.

The alumina spot price was less than 12% of the London Metal Exchange aluminum price for much of Q2, well below both current term contracts at 15.5% to 15.8% of the LME and the 16% averaged for spot units over 2020.

While the Platts Australian benchmark rose in Q2, the increase was modest at $10.50/mt or less than 4%, pulled up not by its own merit but by sharply rising aluminum prices and margins. The three-month LME aluminum price surged $298.50/mt or nearly 13% over the same period to close the quarter at $2,535/mt.

Aluminum has been riding a commodities boom to date in 2021, spurred by massive stimulus spending by governments and pandemic-induced loose monetary policies.

Governments across the world have pumped stimulus worth trillions of dollars into their economies, along with infrastructure spending. Central banks have also taken drastic measures by slashing interest rates. Consequently financial markets, fueled by easy credit, have seen investors rush in, sending commodities and equity prices higher.

However the price of alumina has struggled to keep up as aluminum surged due to excess supply. The greenfield Al-Taweelah refinery in Abu Dhabi has been producing smoothly at close to 100% of its 2 million mt/year capacity, and although half of this new capacity was offset by Alba's 540,000 mt/year new smelting capacity in Bahrain, it injected about 1 million mt/year of refining capacity in the region.

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In addition, India's Vedanta Resources has been increasing its alumina output more rapidly than its aluminum output over the last two years. The group's alumina yield rose 340,000 mt or about 23% in the two years to the March 31 end of fiscal year 2020-21, while aluminum inched up 10,000 mt or 0.51% over the same period.

Notably, China also accelerated its alumina output growth significantly in the first half of 2021. Although it also boosted its aluminum output, alumina production maintained a wide lead during the first five months of the year. While the gap did narrow considerably in May, the lingering impact of the stark imbalances in prior months continued to weigh on alumina prices in June.

China's monthly alumina output rose at an average of 11% year on year between January and May, outpacing a 7.65% rise in aluminum, National Bureau of Statistics data showed.

This prompted China to slash alumina imports, with the volume arriving over January-May plunging 25% year on year to 1.14 million mt, customs data showed.

Arrivals continued to slow even when, in an unusual occurrence, the price of Australian alumina fell below that of domestic Chinese tons. This was because freight rates soared to exceptionally high levels over the same period, keeping buyers away.

The commodities boom has pressured Handysize freight rates to uncommon highs since March. As prices and demand climb for aluminum, copper, coal, iron ore and grain, demand for cargo transportation has soared.

Moreover, pandemic-induced quarantine regulations, social distancing measures and border closures have compromised global supply chains, slowing shipping turnaround times and adding further to freight costs.

It now costs about $47/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. In early January, it cost $21.70/mt.

The spike in freight rates has weighed on alumina FOB values, as it has caused the landed price of shipments to surge. Traditionally as freight rates increase, they weigh on FOB values.

Sources noted that buyers were favoring larger cargoes over standard shipments of 30,000 mt or 35,000 mt in order to bring down the unit cost of freight. However as larger cargoes are usually harder to come by, market participants have been exploring time- and location-swaps as a means of combining shipments, sources said.

The surge in freight rates has also made it impossible to ship Pacific cargoes to the Atlantic basin, resulting in western alumina trading at premiums to Asian tons.

Platts Iron Ore and Metallurgical Coal Specifications Tree

Pacific Basin imbalance to widen in H2

As alumina supply is expected to become even longer in the Pacific basin during the second half of the year, it appears likely that prices will continue to be disproportionately low relative to aluminum.

India's Hindalco Industries is slated to start commercial production by September of 500,000 mt/year of new alumina capacity at its Utkal refinery. Much of the new output is expected to be offered for sale to third parties, including Vedanta.

In addition, Indonesia's Bintan Alumina and Well Harvest are preparing to bring online two new refineries in H2 with combined capacities of 2 million mt/year .

A small portion of Indonesia's new alumina capacity will be absorbed by new aluminum smelting capacity in Malaysia, where Press Metal is scheduled to start up a 320,000 mt/year facility in H2.

However, Australia's Department of Industry, Science, Energy and Resources in June forecast a global alumina surplus of about 2 million mt for 2021, with alumina production rising 2.2% year on year to 136 million mt outpacing a 1.1% rise in aluminum production over the same period to 67 million mt.