Trade Review: Alumina faces an uncertain Q2 as Russia-Ukraine war continues, disrupts trade

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.

The global alumina market is set to be in a state of flux and uncertainty in the second quarter of this year as ripples from the Russia-Ukraine war and a confluence of inter-connected factors could tip supply and demand fundamentals.

In the first quarter of 2022, the benchmark Platts Australia alumina daily assessment rose to heights unseen since the US sanctions against Russian aluminum giant Rusal and refinery output cuts at Brazil's Alunorte in 2018. Platts FOB Western Australia alumina assessments peaked at $533/mt in Q1, surpassing the $484/mt high in Q4 2021.

The alumina market expected global prices to ease in Q1, after the Beijing Winter Olympics, but this was not to be. China's domestic prices were the exception as curtailed refining capacity in northern China was gradually increased post-Games.

Australia's March 20 ban on alumina and bauxite exports to Russia, however, resulted in an immediate global glut. Prices declined within days to close Q1 at $478/mt FOB, falling below the key $400/mt mark on April 8.

This quarter, market participants are likely to keep a close eye on developments surrounding Rusal's international assets and how it will carve its overseas businesses in order to distance itself from Russia. The increase in supply out of Australia will also be in focus.

Export ban boosts near-term Pacific supply

Market participants expect to see more Australian cargoes, initially bound for Russia, made available to the broader market.

Russia imported 1.52 million mt of alumina from Australia in 2021, a third of the country's 4.7 million mt of alumina imports, according to Russia's Federal Customs Service.

The total included 2.65 million mt from Rusal's alumina refineries in Ukraine, Ireland, Guinea and Jamaica.

On March 24, the first prompt 30,000 mt Western Australia cargo traded at $510/mt FOB. But it was barred from being delivered to Russia due to its end-March laycan, market participants said, and was subsequently reoffered to the market on short notice.

"Australian cargoes that were imported into China prior to the war and stored at bonded warehouses might be an alternate source of sales to Russia, though it's not certain if and how the export ban could actually be retrospectively implemented on these goods, since they already arrived on Chinese shores earlier," a trader said.

Will the #alumina surplus out of #Australia sustain throughout Q2? #Russia#Ukraine#China#metals

— S&P Global Commodity Insights Metals (@SPGCIMetals) April 13, 2022

Market participants will be monitoring Rusal's subsequent alumina supply following Australia's export ban amid renewed discussions of Chinese domestic alumina exports filling the supply gap.

China, the world's largest alumina producer, sold 780 mt to Russia in 2021, almost nothing compared with the volumes that arrive from traditional destinations.

China's subsequent alumina exports will shed light on domestic price movements, sources added, as it remains to be seen how fresh demand and new production capacity for Chinese alumina will balance.

Platts had assessed China domestic alumina at a Yuan 3,310/mt EXW peak in mid-February, about Yuan 1,000/mt below the record high assessment of Yuan 4,120/mt EXW in October 2021, data by S&P Gobal showed.

Rusal's international assets of key concern

Rusal's stakes in the Aughinish refinery in Ireland and the Queensland Alumina Limited refinery in Australia increases the potential for disruptions to production and trade flows in light of the ongoing geopolitical crisis.

The 1.99 million mt/year QAL refinery encountered its first disruption to the supply of bauxite following Rio Tinto's March 10 announcement that it was severing relationships with Russian businesses. Market participants said the bauxite, initially bound for Ukraine, could be diverted to Ireland instead, since Rusal's Nikolaev refinery in Ukraine halted production after the invasion.

Further disruptions to the supply of alumina to smelters in the Atlantic could drive regional aluminum premiums and Brazil's alumina differential to the Pacific basin higher, should procurement challenges in the Atlantic and high freight persist.

In Gladstone, Rusal's 20% stake in the Australian QAL joint venture with Rio Tinto amounted to 742,000 mt of alumina from the refinery, out of 3.705 million mt for the year. Production equated to about 94% of capacity utilization for the 3.950 million mt/year facility.

Rio Tinto said April 8 it was taking full control of the Australian JV with Rusal following a government export ban.

QAL continues to be 80% owned by Rio Tinto and 20% owned by Rusal, according to the statement, but the latter had effectively suspended Rusal from participating in the management of QAL and claiming a share of its output.

Some market participants expect the JV refinery to continue production as usual with Rio Tinto operating the facility as majority shareholder. Other sources of Rusal's share could eventually be suspended to prevent Russian entities from receiving profits via the JV without an actual takeover of Rusal's stake.

Uncertainty over Rusal's stakes in its international assets and consequently cross-border alumina trade flows are expected to remain key themes in Q2.