Alumina prices dive to 4-year low after strong start to 2020

Alumina began the year on a bullish note, supported by strong buying interest from China, but pivoted dramatically in mid-March as COVID-19 escalated into a global pandemic.

China imported an exceptional volume of alumina over the fourth quarter of 2019, which continued into January and February of 2020, driven more by the appeal of imports being priced far cheaper than domestic supply than any shortage.

As the COVID-19 epidemic took hold in China from the second half of January, province-wide lockdowns to contain the spread created acute overland transportation bottlenecks. This caused domestic alumina prices to jump - further fueling appetite for imports.

Ironically, China had ample supply of locally produced alumina, but there were major obstacles in getting the tons to consumers by truck or rail.

Meanwhile, the surge in China's alumina imports caused severe congestion at Bayuquan port in the country's northeast. By late January, ships were waiting up to 25-30 days for a discharging berth, and sizable demurrage costs became a major concern.

The build-up of ships at Bayuquan was compounded by the withdrawal of another large alumina discharging port in the region, Lianyungang, which has been scaling back its alumina volumes over the past 6-12 months in favor of iron ore. At the height of the congestion at Bayuquan, it was not uncommon for demurrage costs to run into $7-$9/mt, market sources said at the time.

Platts Australian alumina benchmark assessment rose $29/mt or about 11% between January 2 and early March, hitting a Q1 peak at $304/mt FOB on March 6. At the time the upswing in alumina went against the grain in the commodities complex, with the majority of other products, including aluminum, seeing prices falling steeply on macroeconomic concerns.

As aluminum prices on the London Metal and Shanghai Futures exchanges tumbled week after week, the price of alumina as a percentage of aluminum soared, putting immense pressure on aluminum smelting margins.

By the end of Q1, market participants estimated that 30%-40% of global smelters could be running at a loss. In China, total aluminum stocks were close to double the historical average of 1 million mt.

In February, China was forced to curtail between 1.5 million mt/year and 3 million mt/year of alumina refining capacity when state border closures restricting interstate travel disrupted access to domestic bauxite, coal and caustic soda supplies for several refineries.

But alumina's fortunes really began to wane in mid-March when LME and SHFE aluminum prices sank to four-year lows, levels low enough to raise the specter of smelting cuts.

The price of alumina has fallen fast and hard since then, and higher-cost producers may not be able to break even at the current market level of around $230/mt FOB Australia, market sources said.

A handful of global smelters have also pared back aluminum output, including Albras in Brazil, Aluar in Argentina and a New Zealand plant owned by Rio Tinto. Market participants do not rule out more smelting cuts in coming weeks.

Related Q1 review and Q2 outlook:

• Metallurgical coal
• Iron ore
• Steel
• Ferrous scrap

OUTLOOK BLEAK FOR Q2, POSSIBLY Q3

Since COVID-19 escalated into a global pandemic in March, ravaging economies across the globe, the picture no longer looks rosy for alumina and aluminum for Q2 and possibly through Q3 as well.

With the global economy extremely fragile, aluminum stocks are high around the world as the automotive, construction, electronics and aeronautical industries experience severe slowdowns.

Market participants say there may be more aluminum smelting cuts in Q2 than in the refining sector, as the former has been struggling with poor margins for a longer time.

Numerous greenfield and brownfield alumina and aluminum expansion projects are also expected to be put on hold until the crisis passes.

In addition, the price of alumina in the Atlantic Basin is expected to continue trading at a discount to the price in the Pacific in Q2 due to a supply overhang, even though the discount narrowed considerably over the course of Q1 to around $10/mt from a peak of $20/mt.