Shaking up Shanxi’s bauxite industry

By Laura Syrett, Albert Li
Published: Saturday, 24 January 2015

China’s Shanxi province is the world’s biggest producer of refractory grade bauxite, but it is also one of the most corrupt and dysfunctional regions in the country. Albert Li, Shanghai Analyst and Laura Syrett, Prices Editor, examine the problems the region is facing and the measures being taken to reform the sector.

On the 3 December 2014, a meeting was held in the Chinese city of Tiayuan, the capital of Shanxi province, to discuss the regulation and management of the bauxite industry in Shanxi, Guizhou and Henan provinces - the three main bauxite-producing regions in China.

The meeting was attended by representatives from the refractories manufacturing associations of each of the three provinces, who debated possible measures for developing the domestic bauxite industry, which in recent years has been dogged with production and corruption issues and disrupted by inconsistent and unpredictable resource policies.

Four points of note were agreed at the meeting. Firstly, it was decided that the bauxite in Shanxi, Guizhou and Henan is geologically unique and needs to be scientifically analysed and categorised to encourage factories to conduct research into its potential applications. 

Secondly, it was suggested that the Chinese government should instigate a policy of bauxite resource allocation for large aluminium and refractories companies in order to ensure the efficient utilisation of reserves. 

Thirdly, the institutions agreed that bauxite and alumina companies should cooperate closely and be guided by government and industry associations so that production can be controlled to avoid excess capacity and price wars.

Finally, it was decided that regions with experience of value-added mineral beneficiation such as Henan, Shandong, Zhejiang and Beijing, should liaise regularly with industry associations in other parts of China to assist in developing their bauxite processing industries.

While these resolutions indicate a genuine desire at the provincial government level to implement progressive reforms in the Chinese bauxite sector, market observers believe that the discussions are unlikely to lead to meaningful action.

"I do not think it is possible to instigate a process of resource allocation for companies wishing to use it," one source familiar with the Shanxi bauxite industry told IM. "They want to do something, but [it takes] time to do this kind of 'small thing’," they said.

A second, larger meeting of the provincial bauxite associations is due to be held in Shanxi later this year, in recognition of the deepening problems and uncertainties the industry is facing, including the reduced availability of bauxite ore following the Indonesian export ban in 2014 (see box).

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Shanxi bauxite

Bauxite ore (>45% Al2O3) is the dominant commercial source of alumina for aluminum metal production, which accounts for 80-85% of the market. The rest is mainly consumed in non-metallurgical applications, principally high alumina refractory material and high alumina cement.

The Chinese government is eager to stress the unique characteristics of the bauxite ore mined in Shanxi province - the main source of refractory grade bauxite for the rest of the world - and to maximise its value through efficient extraction and value-added processing.

In testimony to the importance of bauxite to the region, an article on China’s Ministry of Land and Resources website entitled "Shanxi bauxite: a self portrait", describes the mineral in a first person monologue.

"My home is in central Shanxi province, where we retain proven reserves accounting for more than 40% of the [country’s total bauxite reserves]," the article states. It describes how the region’s bauxite is distributed among 13 areas and that the majority is medium grade material with an alumina-silica ration of 4:6, with high grade material (alumina content of over 70%) making up just 12.9% of the province’s resources.

The article also laments the inefficiencies of the Shanxi bauxite industry. "It is sad that a lot of my brothers and sisters of millions of years have been thrown away as useless objects. Bauxite mining enterprises average recovery rates of about 65%. Some state-owned mines, due to their scale and the use of mechanised mining, achieve recovery rates of above 65%, but with a higher dilution rate, reaching about 24%," it states. 

Even more distressing, the article claims, is that the vast majority of bauxite clay is extracted from individual small mines in Shanxi which manage recovery rates of just 20%, meaning that most of the resources are wasted.

"We will be extinguished in 35 years if we are not properly protected," the article warns. 

The need to protect limited and "unique" domestic mineral resources has been used by China in the past to justify export quotas on raw materials. 

The ruling in the high profile World Trade Organization (WTO) case against China’s restrictions on exports of rare earths, molybdenum and tungsten in March 2014 means it is unlikely that China will be able to use trade mechanisms to preserve its resources in future, leading it to veer towards internal controls instead.

Again, market observers are skeptical about the efficacy of such an approach. "You have to remember that this is China," one overseas buyer of Chinese bauxite told IM

"It is likely that we will see the formation of new institutes and meetings will be held about this, but it is doubtful whether the government can effectively ring-fence its resources."

Refractory grade bauxite prices

Bauxite, refractory grade, Chinese, Al2O3/Fe2O 3/BD, lumps 0-25mm

Grade

Price

Shanxi, FOB Xingang, round kiln, 87/2.0/3.2

$375-385/tonne

Shanxi, FOB Xingang, round kiln, 86/2.0/3.15-2.0

$370-380/tonne

Shanxi, FOB Xingang, round kiln, 85/2.0/3.15

$310-320/tonne

Shanxi, FOB Xingang, rotary kiln, 86/1.8/3.15

$385-395/tonne

Shanxi, FOB Xingang, rotary kiln, 85/1.8/3.15

$320-335/tonne

Shanxi, FOB Xingang, calcined kiln, 88/1.8/3.25

$395-415/tonne

Shanxi, FOB Xingang, calcined kiln, 87/2.0/3.20

$370-390/tonne

Shanxi, FOB Xingang, calcined kiln, 86/2.0/3.15

$350-370/tonne

Shanxi, FOB Xingang, calcined kiln, 85/2.0/3.10

$330-350/tonne

 

Source: IM Prices Database 


Cracking corruption

Shanxi province has a reputation for being one of the most corrupt provinces in China, owing in part to its abundance of valuable natural resources.

The province hosts China’s richest coal resources, which supply the country’s electricity and heating industries, and connections between local coal and power companies and members of China’s ruling elite has fuelled a culture of bribery and corruption in Shanxi over the last two decades.

China’s new government has pledged to stamp out corruption in the province, but is struggling to weed out illegal practices deeply embedded in Shanxi’s business culture. 

The province is also in the throes of a banking crisis. Shanxi banks will only provide loans to large companies, even though most of the mining in the region is carried out by small businesses, paralysing those mineral producers that do not have access to alternative funds. 

Prevalent in, although not unique to Shanxi, is the problem of export fraud. Local bauxite producers reportedly conduct deals on a cash-only basis to sidestep VAT, cutting the cost of material to buyers by around 20%.

Companies also export material under false descriptions to avoid paying taxes levied on higher value materials - a practice which skews prices in the international market.

Bauxite prices (see table) have been broadly stable since the final quarter of last year, although falling freight rates are expected to feed into slightly lower delivered prices in Q1 2015.

Export data from January-November 2014 show varying month-on-month shipment volumes for Chinese alumina, although the wider market trend for aluminium metal is positive, having avoided many of the problems experienced by the copper and steel industries in the last year.

According to data from China Bureau of Statistics, China’s December 2014 alumina production reached 4.29m tonnes, up 15.1% year-on-year, bringing total alumina production in 2014 to 47.8m tonnes, up 7.1% from 2013.

Indonesian bauxite ban

Since the last decade, China’s reliance on imported bauxite has been as high as 50%, in order to feed strong consumption growth in the domestic aluminium and refractories industries. 

Indonesia’s January 2014 ban on bauxite ore exports saw its proportion of world supply drop from 18% to 13% and slashed the amount of material sent to China by 47.8% in the first three quarters last year, forcing China to look to other countries for its bauxite supply.

Australia has replaced Indonesia as the number one bauxite supplier to China, accounting for 40.9% of Chinese bauxite imports between Q1 and Q3 2014, but several other countries with high grade bauxite deposits are long distances from ports, have poor infrastructure or are located in politically unpredictable jurisdictions like Venezuela and Guinea. 

Despite being one of the world’s major sources of the material, producing 19,000 tonnes out of a world total of 259,000 tonnes in 2013, according to the US Geological Survey (USGS), India’s bauxite is not of high enough quality for aluminium or refractories. 

Elsewhere, Guyana and Brazil have deposits of sufficiently high grade material (alumina content of >50% and silica content of <4%), which can be mixed with lower grade bauxite in nearby countries to make suitable commercial grades.

Malaysia is also a possible supply option as its bauxite is the closest in composition to Indonesian material, however the country is not presently capable of producing enough bauxite to meet China’s needs.

There have been calls from within the bauxite industry for China’s government to offer financial support to Chinese companies to explore for bauxite and build alumina refineries in other countries to relieve the domestic supply pressure.

The global bauxite market was expected to swing to a deficit of about 6.3m tonnes last year from a surplus of 49.3m tonnes in 2013, according to analysis by Citigroup.

It is anticipated that China’s bauxite stock will start running out in the second half of 2015 and that the country is facing a probable 10-15m tonne supply gap, which may scupper the expansion of Chinese aluminium production and push up prices for bauxite and alumina. 

Based on current growth rates, in 2017 China will need at least 47m tonnes bauxite to supply its domestic aluminum production. Speaking at an industry conference in Singapore last year, Andrew Wood, group executive for strategy and development at Australia-headquartered Alumina Ltd, said that in the long term prices for metallurgical bauxite sold into China may increase to $75-80/tonne, or higher, up from around $60/tonne in mid-2014.