Chinese bauxite: the way ahead

Published: Wednesday, 06 June 2012

The supply structure of one of China’s key export refractory minerals has undergone significant evolution in recent years. Recently returned from China, James Devlin explains how things stand and what the future holds for Chinese non-met. bauxite

CMP’s new bauxite mine at Xiuwen, Guizhou
which has proven reserves of 3m tonnes. Open
pit mining plus a single adit will initially be used
to produce 100-200,000 tpa of non-met. bauxite.

There is a general misconception that Chinese non-metallurgical grade bauxite output is a separate and specific mining industry to that of metallurgical bauxite.

This is not the case: mining of bauxite in China is completely dominated by the production of bauxite for smelter grade alumina.

As is well documented, Chinese bauxite production for metallurgical purposes has massively increased since the beginning of the new millennium.

In 2000, domestic production of metallurgical grade bauxite was approximately twice the production of non-met., the former being about 8m tonnes and the latter approximately 4m tonnes.

During the past 11 years non-met. production has grown only marginally to 5m tonnes, whereas metallurgical bauxite production has increased to upwards of 34m tonnes.

The drivers of this change have also been the architect of the current industry structure. Government policy places bauxite under the aluminium business, which is a designated “strategic” industry with a very strong politically empowered national champion, China Aluminium Co. (Chalco).

Pre-2003, there were a very large number of very small bauxite mines, mainly village, district, or family run. These enterprises mined on a very rudimentary scale, mainly retrieving high-grade raw bauxite from shallow underground mining and small open pits.

However in the period 2000-2003, owing to the Chinese policy of developing the aluminium business and its national champions, the legal right to mine bauxite was almost exclusively allocated to Chinese domestic smelter grade alumina producers and is now dominated and effectively controlled by Chalco.

Even those bauxite reserves which are not held by Chalco are mostly held by other government owned or quasi-government owned domestic aluminium and power companies.

Today an industry comprising over 100 large scale legal mines, 200 alumina refineries, and 169 primary aluminium smelters, is administrated by over 231 government departments, one of which described the domestic bauxite reserve situation as follows.

Past times: examples of traditional shaft and round
bauxite kilns operating in Shanxi province during the
1990s, many have since closed under recent government
environmental regulations.

Chinese bauxite reserves

Shanxi province’s bauxite and kaolin reserves total 1.5bn tonnes and are the best quality and largest in China.

Shanxi’s metallurgical grade bauxite reserves are conservatively estimated at 940m tonnes, and non-metallurgical grade bauxite 594m tonnes.

Guizhou province hosts bauxite reserves of about 436m tonnes, with met grade bauxite 387m tonnes and non-metallurgical grade at least 49m tonnes.

High quality bauxite reserves are mainly distributed in Qingzhen, Xiuwen, Zunyi, Huangping, districts of Guizhou.

Henan province has over 660m tonnes of bauxite reserves made up 376m tonnes metallurgical and 116m tonnes of abrasive/refractory grade bauxite.

Geographically, Shanxi and Henan account for 44% of China’s bauxite reserves and approximately the same percentage of domestic bauxite production.

While there are some private groups producing metallurgical grade alumina and operating bauxite mines, their output relative to the state sector is negligible.

CMP’s rotary bauxite kiln at Jiexiu, Shanxi.

Chinese bauxite consumption

Total Chinese bauxite consumption of all grades is estimated at 77m tpa, of which 45m tpa tonnes is imported.

Estimates of company domestic consumption indicate that Chalco dominates with (directly and indirectly) some 70% of total usage.

The next five consumers, plus Chalco, account for over 93% of China’s total bauxite consumption.

Since in Shandong, Shandong Xinfa Aluminium Group and Weiqiao Aluminium, two of the leading smelter grade alumina producers, almost exclusively use imported bauxite, this further demonstrates how very little bauxite production is in the hands of other entities.

There are some users in central China, such as: Shanxi Luneng Jinbei Aluminium (state owned), Coalmine Aluminium Sanmenxia (foreign owned), Qinyuan LaoAoGou, Shanxi HeShun (both part state-owned).

Chinese non-met bauxite usage at best accounts for 6.5% of total domestic bauxite consumption, and exports of non-met. (refractory) bauxite are at best 1.3% of the total Chinese domestic bauxite usage, consequently government policy concentrates on the needs of Chalco and the aluminium industry.

Limited non-met. sources

Part and parcel of the allocation of Chinese mining rights to the state aluminium sector has been a parallel legislative process to close down all illegal mining and private small and medium-scale mining.

Considering that China has always been the dominant world producer of non-met. bauxite, this seems to be an odd state of affairs.

Technically, the low-iron, relatively high-silica Chinese diasporic α-AlO(OH) bauxite is most suitable for producing calcined bauxite grades for refractory use and rather less suited to smelter grade alumina production. Indeed, it is more expensive to produce smelter grade alumina from diaspore bauxite than low-silica gibbsite or boehmite.

Generally speaking, non-met. bauxite producers in China have been closed down, and in fact there are only three mines which are producing bauxite primarily targeted for the non-met. sector.

So where does Chinese non-met. calcined bauxite come from? The three Chinese mining companies that specifically target the non-met. sector are: Bosai Minerals Group Co. Ltd, ChenQian, and CMP Xiuwen, all of which are in Guizhou province.

CMP has only just purchased the Xiuwen mine in Guizhou which has proven reserves of 3m tonnes.

The official mining licence was granted to CMP Xiuwen Mining Development in March 2011, and open pit mining plus a single adit will initially be used to produce 100-200,000 tpa of non-met. bauxite.

In Shanxi and Henan, there are no legal mines producing exclusively non-met. grade bauxite. Raw material from these provinces is gathered from a combination of illegal mines and material appropriated from the metallurgical grade mines.

It is very common to see individuals and domestic traders at “collection points” standing outside alumina refineries with signs advertising cash payment for the purchase of high-alumina, low-iron bauxite; incoming trucks often take a detour to see if they can get a better price for the cargo than delivery to the alumina plant.

This is particularly true for those alumina plants which are semi-integrated. These domestic traders collect different batches of higher grade bauxite and sell it on to processors and calciners through a web of domestic intermediaries.

This is one of the main reasons why non-met. grade bauxite feedstocks have become so expensive since 2003, and also why the quality has become so variable while at the same time the average quality has fallen so much.

This supply chain has little ability to control quality, or grade the bauxite, and the reality is that it can only collect what is available as opposed to specifically mining what is required.

Hence the recently increasing premium of higher grades over average material. With the exception of the few dedicated producers, the entire domestic and export supply markets follow this regime.

Impact on prices and exports

Consequently, non-met. bauxite has absolutely no pricing power whatsoever, and prices are defined by the metallurgical sector, as is the supply and availability of the product.

Prices of metallurgical grade bauxite are themselves defined by domestic mining costs and competition from imports.

Since 2005, the cost-benefit analysis has moved in favour of imported bauxite especially in Shandong - a mere 2m tonnes imported in 2005 has swollen to 45m tonnes in 2011. Domestic bauxite ex-works prices at RMB300($47.5)/t are now more expensive than average to imported bauxite (mainly from Indonesia) CIF prices at RMB285($45/t)/t.

In fact the sea freight to China from Indonesia is less than the internal Chinese transportation cost from Shanxi and Henan to Shandong.

Moreover, imported bauxite is much easier and more cheaply converted to smelter grade alumina as it is mostly low-silica gibbsite or boehmite.

Chinese calcined bauxite plants and brown fused alumina (BFA) plants, ie. for processing non-met. bauxite and alumina grades, are fed by domestic traders and buy on spot prices only.

Domestic prices for calcined bauxite are set by domestic inflationary pressures, particularly energy and transport costs; domestic energy costs have been continually rising in recent years despite massive increases in capacity.

Price changes can be immediate and dramatic depending on the supply and demand situation for the metallurgical side and stock availability.

Because the higher alumina containing ore is a very small fraction of the total production, the premium for higher alumina raw bauxite has grown dramatically in recent years - prices ex-mine central China are approximately:

Raw bauxite, minimum 76% Al2O3, (88% Al2O3 after calcining) RMB1,000($158.3)/t

Raw bauxite, minimum 73% Al2O3, (86% Al2O3 after calcining) RMB700($110.8)/t

Raw bauxite, minimum 70% Al2O3, (83% Al2O3 after calcining) RMB400($63.3)/t

Raw bauxite, minimum 55% Al2O3, only for metallurgical use RMB300($47.5)/t

For the mineral export market (as is well documented), the government has put in place an export licence quota system to discourage and limit exports for calcined bauxite, but has recently lost the World Trade Organization (WTO) case in defence of this system.

With estimated non-met. bauxite exports in 2011 of <800,000 tonnes, compared to metallurgical domestic production of 32m tonnes, the stated justification of this system (to conserve mineral resources and limit environmental damage) seems somewhat disingenuous.

Those companies involved in exporting bauxite, with two exceptions, are intermediaries and do not themselves own legal bauxite mines.

Outlook for calcined bauxite exports

Under the current supply chain, none of the intermediary traders supplying the raw bauxite to the Chinese calciners and BFA plants are VAT registered. This means the 17% VAT is in fact a pure sales cost, because it cannot be deducted from VAT charged on the sales of the BFA or calcined bauxite.

This is critical for exports, as currently the VAT is charged on top of the FOB price, plus the export licence cost (RMB200($32.5)/t), which adds up to a tremendous premium of export prices over domestic prices, with the difference being transferred to Government coffers.

Therefore it is likely that after the loss of the WTO case, while it is widely expected that the export licence system will be scrapped, it remains to be seen what will replace it.

What is most unlikely is that it will become a free-for-all as the government collects significant VAT and export licence income at the moment from mineral exports (not just bauxite).

What is most likely is that a much tighter regulated system of mining rights, mining taxes, and resource taxes will sooner (or later) be implemented - much like what is going on in the bauxite industry in Indonesia.

At the same time, industry involvement will necessitate VAT registration and payment of taxes. If, as expected, this does replace the current system, then one would expect the number of suppliers to be reduced dramatically and only the strongest to survive.

James Devlin is managing director of CMP Sales Europe, London UK.