October 11, 2019 / 1:00 AM / a month ago

RPT-COLUMN-Mind the alumina gap as Western and Chinese prices diverge: Andy Home

(Repeats to additional subscribers)

* Alumina Price in China and the West: tmsnrt.rs/33iBvD9

* China's Alumina Trade: tmsnrt.rs/2p82jHH

By Andy Home

LONDON, Oct 10 (Reuters) - The alumina market is currently seeing a widening gap in pricing between China and the rest of the world.

Outside of China the price of the aluminium input has fallen below $300 per tonne for the first time since the second quarter of 2017.

Last year’s explosive rallies above $600 per tonne are a distant memory as the full return of the giant Alunorte refinery in Brazil stabilises supply.

In China, by contrast, local prices have rallied by 10% over the last two months to a current 2,650 yuan ($365) per tonne, according to Shanghai Metal Market.

The Chinese supply chain is proving more unpredictable this year with domestic production hit by unforeseen outages, environmental curtailments and declining raw material availability.

Divergence between Chinese and Western alumina prices is not new but they tend to move broadly in tandem not in completely different directions.

Increased Chinese imports should in theory rebalance the global market and close the price gap. However, that has not happened yet and this divergence may turn out to be more structural in nature.

ALUNORTE RETURNS

Last year’s turbo-charged alumina price rally was triggered by the partial closure in February of Alunorte after an alleged tailings dam spill and exacerbated in April by U.S. sanctions against Russian producer Rusal.

Panic over the impact of the sanctions on the alumina supply chain proved short-lived and any price effect was over well before the sanctions were formally lifted in January this year.

But it took Hydro until May to get permission to return Alunorte to full production and until last month to get final court approval to use a new tailings dam.

Alunorte is the world’s largest single alumina plant, with an annual capacity of 6.3 million tonnes per year, meaning the 50% suspension of production from February 2018 upended the market’s supply-demand balance.

Hydro has said the plant will run at 75-85% of capacity through the end of 2019 with a gradual return to full production pencilled in for 2021.

It’s still enough to tip the market outside of China from deficit to oversupply and the price has been falling ever since the restart news.

Such is the scale of the Alunorte effect that a refinery outage in Jamaica has failed to make any impact whatsoever on the price slide.

Chinese operator Jisco is in the process of closing the 1.65-million tonne per year Alpart refinery for a major refit and expansion expected to last two years.

You’d be forgiven for not noticing.

CHINA DISRUPTION

Last year’s supply disruption and price distortions in the Western market caused China to flip to being a net exporter of alumina, historically a rare occurrence.

This year, by contrast, it is China with the supply problems.

A tailings dam spill in May at Xinfa Group’s Jiaokou alumina refinery in Shanxi led to closures both of that plant and others in the area as environmental inspections were stepped up.

The local alumina price rallied strongly at the time before sinking again in tandem with the falling Western price.

That linkage has been broken since the middle of August with the China price now rallying even as the Western price touches fresh lows.

More environmental pressures are in the mix with the city of Luliang in Shanxi ordering alumina refineries to cut production by 50% at the end of September as part of an anti-smog campaign.

The curtailments only lasted a week but they serve as a reminder that alumina has tended to be more affected than primary aluminium by China’s war on smog, which will see more capacity closures running into the winter heating season.

Environmental issues are also limiting domestic production of bauxite, the mineral that is converted into alumina at the start of the aluminium production process.

A growing number of Chinese alumina producers are tweaking their plants to run on imported rather than domestic bauxite.

Bauxite imports jumped by 21% last year and they were up by 30% in the first eight months of this year.

This of course leaves the local supply chain ever more sensitive to external threats such as Indonesia’s potential ban on bauxite exports.

REBALANCING

This divergence in price between East and West is causing a rebound in China’s imports of alumina after last year’s brief period of net exports.

Exports tumbled almost 50 percent in the first eight months of the year and have been running at below 5,000 tonnes per month for the last three months, a level that suggests most of them are in the form of non-metallurgical grade alumina.

Imports accelerated sharply over July and August. The two-month tally of 322,000 tonnes is the fastest pace of import since 2017 and brings the cumulative year-to-date increase to 72%.

China’s renewed appetite for imported material will play a role in rebalancing the global market and should put a floor beneath the current low price in the Western market.

However, there is a sense that the price differential may be signalling structural differences between Chinese and non-Chinese markets, particularly since it is being mirrored in aluminium pricing.

China has grown to be the world’s dominant aluminium producer over the last decade with the rest of the world complaining about the country’s tendency towards chronic overproduction and large exports.

The non-Chinese component of the aluminium market tends to view China as a net price negative for these reasons.

However, China’s aluminium sector is far from monolithic and is less structurally stable than its Western counterpart.

Every stage of the Chinese production chain, from bauxite though alumina to aluminium, appears to be more volatile than in the West thanks to the combination of rolling government reform and environmental crackdown.

The current split in prices, both those for alumina and aluminium, could be no more than a passing phenomenon.

But if the Chinese market is now starting to price in domestic supply instability, the current divergence could be around a lot longer.

That makes the alumina gap worth minding.

($1=7.1125 yuan)

Editing by Steve Orlofsky

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