Trade Review: Alumina markets brace for cost pressures, demand uncertainties in Q4 amid energy concerns

This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, metallurgical coal, copper, alumina, and steel and scrap. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Alumina and primary aluminum markets globally could continue to see volatility and production challenges in the fourth quarter amid sustained concerns over energy prices and trade flow disruptions, while the indications for downstream demand are mixed.

Market participants in China are anticipating potential policy updates for the aluminum industry on energy consumption and environmental guidelines at the National Congress of the Chinese Communist Party in mid-October. This comes at a time when Chinese smelters have been priced out of the seaborne markets by a closed import arbitrage window since Q1 and amid uncertainty over the impact of the winter on the country's domestic aluminum industry.

There are also mounting concerns of production being curtailed further in European alumina refineries amid elevated energy prices.

Platts assessed the benchmark FOB Australia alumina at $320/mt FOB Oct. 7, with the FOB Brazil alumina Atlantic differential at a $30/mt premium to Australian material. The Platts China ex-works Shanxi alumina assessment was largely rangebound for July and August and stood at Yuan 2,790/mt Sept. 30, down from Yuan 2,870/mt in the beginning of the quarter.

Australian prices volatile amid output issues

Prices for Australian alumina were volatile in September and there were some delays in shipments out of Western Australia amid heavy rain, sources said.

Spot deals were reported at up to $358/mt FOB Australia in the week ended Sept. 16. However, the market started to lose these gains in the final week, with prices ending the month at $320/mt FOB, a year-to-date low at the time.

Sources said that the maintenance schedules of refineries have also not completely returned to normal following disruptions since the start of the pandemic.

However, some additional supply will be available in the market in the near term as Indonesia's Bintan Alumina refinery commissioned its second phase of production in September, doubling its capacity to 2 million mt/year.

Market participants said they expect output concerns and sentiment to guide near-term prices given uncertain fundamentals.

Upcoming congress, winter impact in China

Alumina prices in China had risen gradually in August on the back of refinery cuts and cost pressures but fell to year-to-date lows in the latter half of Q3 due to reduced smelter operations in Sichuan and Yunnan amid hydropower shortages.

The market had also expected some refinery curtailments in north China due to environmental audits and scarcity of imported bauxite in Q3, but this did not come to pass. Latest customs data showed that China's bauxite imports rose 23.5% on the year and 1.5% on the month to 10.7 million mt in August.

Chinese alumina exports fell on the quarter in Q3 while domestic spot volumes rose, leading prices in Shandong to fall to Yuan 2,800/mt ex works after having held firm at Yuan 3,000/mt for two months in Q2.

"The winter season is approaching, and from what we saw last year, imbalanced output cuts and material mismatch could still drive price fluctuations in the fourth quarter," a Chinese trader said.

Prior to the Yunnan smelter curtailments, China's primary aluminum output had hit a new high of 3.51 million mt in August, rising 9.6% on the year and 2.3% from July.

Apart from costs associated with restarting idled smelting capacity, Q4 will see electricity prices increase due to tight hydropower supply and coal prices rise amid winter heating demand, Chinese sources said.

Atlantic output, downstream demand in focus

Aluminum smelters were the hardest hit by rising energy prices in the Atlantic basin. However, alumina refineries and downstream aluminum businesses have also started feeling these cost pressures going into Q4, leading to supply-demand uncertainty in Asia and likely most of the world.

Several European refineries are already running at reduced rates while others are assessing their options.

The San Ciprian refinery situation in Spain "is up in the air," a producer familiar with the refinery's operations said. "All refining in Europe is losing a significant amount of money. We are working through the business cases now and will look to take action within the next couple of weeks."

The Aughinish Alumina refinery in Ireland, which is owned by Rusal, was producing at a rate of 1.7 million mt/year, according to sources familiar with its operations, marking a 10% reduction from pre-war levels.

Take our poll!

Will European #alumina refineries curtail output further in Q4?

— S&P Global Commodity Insights Metals (@SPGCIMetals) October 11, 2022

Sources largely expect alumina flows from the Pacific to the Atlantic to remain elevated in the near term as the Jamalco refinery in Jamaica has yet to ramp up to full on-spec production. The San Ciprian refinery has reduced output by 50% as of Oct. 1, and the premium for Atlantic alumina and cross-continent demand for Australian material will rise if it decides to cut production further.

In Q4, the demand for aluminum products will also be threatened by rising inflation and higher central bank interest rates across Europe, Australia and the US.

In Norway, Norsk Hydro will curtail about 110,000-130,000 mt of annual primary aluminum production capacity across two of its operations by the end of the year in response to lower demand for aluminum billets in the European market. Near-term demand for aluminum beverage cans is also expected to decline.

Sources said it remains to be seen whether reduced aluminum smelter operations and associated weaker alumina demand can offset potentially greater alumina supply disruptions in Q4.