Trade review: Alumina defies global longs with upswing in price

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.

The alumina market is expected to be primarily guided by higher aluminum production in the coming months, rather than its own fundamentals, after driven by a weak dollar and strong Chinese demand in the fourth quarter.

The Platts Australian alumina daily assessment climbed 12% through Q4 to close at $304.50/mt FOB on Dec. 31, also marking the year's peak.

During Q4, a very strong aluminum price trend propelled the price of alumina upwards, although the gains lagged metal values through the quarter.

Paradoxically at the time, there was a global surplus of alumina, and market participants said several times through the quarter that they didn't expect the price to climb any further. But contrary to expectations, the sheer strength of aluminum and widening metal margins eventually proved many market participants wrong.

BOOSTED BY WEAK DOLLAR, CHINESE DEMAND

The dollar's erosion was a key factor behind the bullish aluminum trend as it weakened to near three-year lows in Q4, driven by broader macro-economic factors.

The value of the dollar and commodity prices often moves in inverse direction, according to market commentators.

As the value of the dollar weakened during Q4 against other major currencies, the prices of commodities generally moved higher, including the base metals complex and aluminum. Ample funds were flowing into the metals complex as financial investors diversified their portfolios. Low interest rates also encouraged aluminum warehouse financing trades.

Additionally, China's increased aluminum consumption and large-scale strategic stockpiling also pulled up the price of the metal. The Chinese government's economic stimulus programs such as increased infrastructure spending and initiatives for promoting electric car production, bolstered demand for aluminum.

Furthermore, a global shortage of aluminum scrap also boosted demand for primary aluminum. COVID-19 containment measures and border closures reduced recycling activity, leading to spikes in primary aluminum consumption, as a substitute for scrap aluminum.

Also in this series:

• Met coal: China-Australia relations transform market dynamics
• Iron ore: Soaring prices set to face hurdles in Q1

SPOT ALUMINA CHEAPER THAN TERM CONTRACTS

Despite its northerly direction, the alumina spot price was discounted to term contract units for a large part of Q4.

The Platts Australian alumina daily assessment was under 15% of LME aluminum values for much of the quarter. For traders and consumers who had term contracts settled as a percentage of LME aluminum values, the percentages tended to be in the high-16s.

Consequently, market participants often viewed alumina as being discounted and affordable despite fixed prices trending upwards through the quarter.

"As consumers who hedge, this [spot] purchase corresponds to a 14.7% of LME lock-in, which is beneficial for us," a source said in early January.

A very strong #aluminum price trend in Q4 2020 propelled the price of alumina upwards | https://t.co/ur9mXgsw4G

Will Australian #alumina export prices finish the Jan-Mar quarter higher than the Oct-Dec quarter ($304.50/mt)?

— Platts Metals (@plattsmetals) January 20, 2021

ALUMINA TIPPED TO BE LONG AGAIN IN 2021

Market participants generally anticipate a long alumina market in 2021, with the surplus generally estimated at around 4 million mt in 2021, compared with 3.5 million mt in 2020. At the same time, global alumina consumption is also expected to be high, due to high primary aluminum production.

Indonesia is slated to start two new refineries, adding 2 million mt/year of capacity.

The newly operational Al-Taweelah refinery in Abu Dhabi has been producing smoothly at close to 100% of its 2 million mt/year capacity.

Rio Tinto has announced plans to shut its aluminum smelter in New Zealand by August 2021, due to high costs. The unit produced 351,000 mt of aluminum in 2019 and its closure would free up about 700,000 mt/year of alumina from the Yarwun and Queensland Alumina refineries in Australia.

Alcoa's plan to close for good its San Ciprian aluminum smelter in Spain by Q1 2021, was derailed by the federal court last December. Alcoa's intention had been to continue operating the associated alumina refinery, thereby freeing up about half a million mt/year of alumina for sale to third-parties. Alcoa is reviewing its plans for San Ciprian.

Meanwhile in downstream, a number of smelters in Malaysia, Norway and the US are expected to expand aluminum production. Press Metal in Malaysia is slated to start about 300,000 mt of new smelting capacity in 2021.

Norsk Hydro is in the process of ramping up smelting rates at the Husnes unit in Norway by 100,000 mt, and Century Aluminum plans to boost runs at the Mt Holly smelter in the US to 75% of its 229,000 mt/year capacity from 50% after April 1, 2021.

Alba's newly expanded aluminum smelting capacity of 540,000 mt/year in Bahrain has also been operating smoothly.

Market sources have said they would expect the primary drivers for the price of alumina in 2021 to be the LME aluminum price trend, and China's domestic alumina prices.

China is technically self-sufficient in alumina and can be quick to pare down local production once the arbitrage window opens for imports. Therefore, in a long global market, market participants have said they generally don't expect the price of Western alumina to stray too far from domestic prices in China.

S&P Global Platts Metals Trade Review: MET COAL| IRON ORE | SCRAP | ALUMINA