ALUMINIUM
Price Volatility and Environmental Scrutiny
June 2017
Since early May, over 4Mtpa of refining capacity in China has been announced as curtailed, or planned to be curtailed. These stoppages are due to poor profitability in the face of three primary issues—firstly, the falling alumina price with weakening smelter demand; secondly, increasing bauxite sourcing issues and raw material prices; and thirdly, increased environmental scrutiny as inspection teams begin assessing province emissions.

Refineries Face Price, Cost, and Environmental Factors

Alumina inventory is seasonally built up during the December Quarter, prior to winter for western and northern Chinese smelters in case of weather related supply interruption. Pre-winter stockpiling saw domestic alumina price rapidly increase from CNY2,100/t (US$305/t) to CNY3,000/t (US$435/t) during the December Quarter of 2016. However, the price strength has not held and has begun an accelerating decline from February after the early months of 2017—the northern hemisphere Spring—as the focus of smelters has been on de-stocking excess inventory. This has caused lower demand for alumina purchased on-market, and has been amplified by limited new smelting start-ups in China. Into the June Quarter, the price has experienced a ~25% fall in the past two months, on the back of significant alumina stock being built at the refineries, and buyers reticent, with an expectation of further price drops due to oversupply. 

 

Local Chinese bauxite, while high in alumina content (>60%) is also high to very high in silica content as indicated by its alumina-to-silica ratio (A/S). A lower A/S ratio means higher processing costs due to the silica level. Domestic bauxite supply quality, particularly to inland refineries has been a developing issue. Domestic bauxite delivered to refineries at a quality of A/S 5.5, has increased from a December Quarter 2016 price of CNY220/t (US$32/t), to CNY350/t (US$51/t), VAT excluded. The cost of processing the lower ratio bauxite, due to higher consumption of caustic soda, has been impacted, with the reagent cost rising from CNY2,400/t (US$348/t) in the December Quarter 2016, to over CNY3,750/t (US$544/t).

 

Refineries Curtailing

The lower alumina price observed recently coupled with higher raw material costs, has seen refinery profitability affected, particularly in Shanxi and Henan provinces. Since the beginning of May, there has been 4.2Mtpa of refining capacity identified as curtailed or planned to be curtailed. Around 1.7Mtpa of capacity was curtailed in Shanxi Province due to the presence of the environmental inspection team from the Central Government through the month, and based on review, required a number of refineries to immediately curtail capacity. The catch-cry of “Environment Inspection Team from Central Government” has become a regularly used phrase in alumina refineries news, with AME understanding the curtailments which occurred in Shanxi and Guizhou Province were driven primarily by environmental concerns to be addressed as a result of the Central Government team inspections.

 

 

Air Quality and Calcination

One aspect driving these closures is the Beijing and provincial air quality issues expected for the winter ahead, which has been notably highlighted for smelters, but which will also impact refineries, generally in proportion to their energy requirements. Within China, which generally utilises higher temperature and high energy alumina refining processes due to silica content, the emissions are likely to be relatively high.  

 

A number of refinery production stoppages have been related to calciner stoppages, reported as being for calciner maintenance. However, the intermediate alumina hydrate production continues, and is stockpiled awaiting the calciners to return to operation. While calciner stoppages may be due to awaiting a market price recovery for SGA, it may be that the outages are related to emissions and environmental inspections, as generally only single calcination units on refinery sites are typically taken offline at any time. The widely used process of coal gasification for providing calcination fuel may be producing emissions to air, ground or water, prompting the sites to implement upgrades to operations as an environmental concern.

Impact of Capacity Curtailment

At the time of writing this article, the alumina price has seen a slowdown in its downward trend and stabilised at around ~CNY2,275/t (US$330/t) since the start of May. The slowing in price fall may be partially attributed to the announced and planned curtailment of ~4Mtpa of refining capacity, even if only temporary. However, if the calcination maintenance outages are completed, and stockpiled hydrate is calcined, there could be a swift return to an oversupply situation, and as such AME does not believe the current manoeuvres in China’s refining capacity signifies the start of any fundamental change in the alumina market at this stage.