Trade review: Alumina anticipates calm Q4 after bumpy Jul-Sep

This is Part 4 of 5 in 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, steel, 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.

After a particularly volatile third-quarter, the alumina market may see less dramatic price swings in the final quarter of this year, a number of market participants have said.

The erratic swings of Q3 were due to a combination of events in the physical and futures markets, as well as the cascading impact from the volatility in the wider financial markets as the COVID-19 pandemic sank the global economy deeper into recession.

#Alumina ended a volatile Q3 at $269/mt FOB Australia on Sep 30. Where do you expect prices to be at the end of Q4?

Our latest #tradereview: https://t.co/hXiiVxyKby

— Platts Metals (@plattsmetals) October 22, 2020

UNPLANNED RUN CUT IN BRAZIL

An unplanned two-month curtailment at the Alunorte alumina refinery in Brazil in August and September created severe supply concerns across the globe, propelling prices higher.

It is the world's largest alumina refinery, and typically exports sizable volumes to Norway, Iceland and Canada. It is also the sole alumina supplier of the 450,000 mt/year Albras primary aluminum smelter in Brazil.

The plant's associated bauxite mine needed emergency repairs to its pipeline, during which the mine was idled and the refinery's output slashed to around 40% of its 6.3 million mt/year capacity, from 90%.

According to S&P Global Platts estimates, Alunorte lost about 283,500 mt/month of alumina output when the curtailment began on Aug. 18.

Also in the Platts Metals Trade Review series:

• Met coal prices rebound from multi-year lows as Q4 outlook firms
• Soaring iron ore prices bring buying flexibility to the fore
• China's steel winter balancing act to decide Asia's fortunes
• Ferrous scrap eyes firmer Q4 on steel recovery, slower collection

CHINESE IMBALANCE LINGERS

Another source of volatility in Q3 was China's mismatched expansion of both its smelting and refining capacities, with market perceptions shifting constantly on whether the country was producing enough alumina to match its aggressive growth in aluminum production.

China's alumina deficit during Q2 had caused domestic margins to swell, fueling anticipation that the country's refining growth would catch up to increased consumption rates in Q3. However, as it turned out, China was not able to balance out its alumina deficit.

The country's alumina output growth continued to lag aluminum in July, and although the growth rate did accelerate in August, it was not enough to level the imbalance that began in Q2.

Official statistics indicated that between January and August, China's metal output climbed more than 2% year on year to 24.3 million mt, while alumina output fell nearly 4% year on year to 47.69 million mt.

China is unique in that it has an unusually large number of plants -- around 50 alumina refineries and 140 primary aluminum smelters -- nearly all of which operate in an opaque environment, where plant restarts, run cuts and closures often take place quietly.

In comparison, Australia, the world's largest net exporter of alumina, is home to five refineries, while the Middle East, the world's largest net importer of alumina, operates just six aluminum smelters, excluding Iran.

Given its magnitude, market participants often say it can be difficult to keep on top of China's alumina demand-supply balance on a real time basis. Market participants often supplement their own research and analysis with official output data compiled monthly by China's National Bureau of Statistics. However, these are typically released nearly two months after the fact, so market participants find themselves having to adjust their trading positions retroactively.

NERVOUS FINANCIAL MARKETS UNDERSCORE UNCERTAINTY

Turbulence in the global financial markets during Q3 added further uncertainty in the alumina market. Stock markets worldwide suffered dramatic falls during the quarter, and the US dollar weakened substantially, which had a flow on effect of raising base metal prices, including that of aluminum and alumina.

Ample funds were flowing into the base metals complex, as volatile equity markets and low confidence prompted financial investors to diversify their portfolios.

The ensuing upward push in aluminum prices offered global smelters some much-needed margin relief, and enabled them to maintain consistent production rates in the face of the significant decline in downstream demand caused by the COVID-19 pandemic.

Not only did aluminum prices soar, the LME price curve also developed a remarkably wide contango during August and September, with the cash and three-month differential averaging nearly $40/mt. It has since contracted to $17/mt on Oct. 14.

Aluminum cash and carry trades were prevalent as investment banks and trading houses were incentivized to buy metal, store it at a low cost due to low interest rates, roll them over and hedge.

The surge in metal prices boosted smelting margins, with the deep contango extending the gains further, both of which helped propel alumina prices higher.

Investor demand helped compensate for the slump in the pandemic-induced downstream demand, and enabled smelters to maintain consistent production despite softer consumer demand.

The CEO of the Aluminium Association of Canada, Jean Simard, called it the 'aluminum paradox'. It was a paradox that smelters were running hard, while the global economy was collapsing.

"This is what I call the aluminum paradox because, while you are allowed to maintain operations as part of the aluminum response industry, your market is in total erosion, so you are losing bits and pieces and larger volumes of sales as we move through the days and weeks," Simard told Platts in an interview in June.

A CALMER Q4 ANTICIPATED

Market participants expect the price of alumina to be rangebound in the coming months, given the demand-supply dynamic.

High global consumption rates are likely to support prices, and at the same time there may not be much scope for drastic increases either, as output continues to creep, they said.

The Alunorte refinery is in the process of returning to normal rates. Shareholder Norsk Hydro announced on Oct. 9 that the pipeline repairs were completed and the refinery expected to return to pre-incident rates within two weeks.

Alcoa announced on Oct. 9 that it would close its 228,000 mt/year San Ciprian aluminum smelter in Spain by Q1 2021, but will continue to operate the associated alumina refinery, potentially freeing up about half a million mt/year of alumina.