Feeling the heat: Bauxite and alumina under pressure

By Davide Ghilotti
Published: Friday, 26 January 2018

China’s high-profile disruptions to industrial operations have wreaked havoc in the bauxite and alumina supply chains serving refractories end markets, taking prices to new highs.

A widespread shortage of raw materials and a plethora of production issues are putting pressure on the non-metallurgical bauxite and alumina markets at the beginning of 2018.

A drastic reduction in output throughout last year, mainly on the back of Chinese-led restrictions to local industrial productions, led to rapid appreciations in markets including calcined bauxite and fused alumina. 

This, and other factors, are set to play out in 2018 as well, and are already affecting markets that are normally governed by more stable contracting arrangements, such as calcined alumina products or alumina hydrate. Availability is limited and prices are moving upward.

In the fused alumina and bauxite space, what China will do in the coming months is set, once again, to direct market performance.

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Alunorte Hydro alumina refinery, Brazil
Norsk Hydro ASA 

In the beginning was China

The country is one of the largest producers of fused alumina (FA) and calcined bauxite, supplying refractories and abrasives end markets. We can trace the beginning of the current shortage now affecting several non-metallurgical bauxite and alumina markets globally to a series of actions taken in China from 2016 onward. 

At the time, two years ago, the market looked very different from what it is today. 

The weak performance of global steel markets, and related sluggish demand for refractories, ensured that prices for both refractory grade bauxite and fused alumina remained weak and supply abundant, along with that of other refractory minerals.

That being the case, the wider industry initially took little notice of what was happening on the supply side, where drastic changes were in the making.

China decided to bring an end to the free-for-all, unregulated mining and industrial processing practices that had, until then, characterized a large part of its industry. 

It did so in two ways: On the one hand, by cracking down on illegal mining and tightening controls on permits, exercising zero tolerance on unauthorized, unregistered operations and tax dodging (especially VAT). In this way, it sought to achieve a more orthodox and regulated industry, which is easier to monitor, while also ensuring more effective collection of tax revenues. 

Refractory grade bauxite prices ($/tonne fob China port) 
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Source Industrial Minerals 

On the other hand, the country enforced existing and new, wide-reaching environmental standards that companies had to follow to reduce their pollution footprint. The measures taken included forcing operations that relied on coal-based energy to switch to natural gas; installing dust control, desulfurization and waste discharge systems, among others.

Beijing declared pollution a number one priority of governmental action, after decades of unmonitored practices had exacerbated contamination of the local environment. Many supply chains were to see immediate consequences from this turn in policy.

Bauxite and fused alumina were among the first victims.  

By the end of 2016, a number of fused alumina and refractory-grade bauxite production facilities had been closed for failing to meet standards. Many of these obsolete, coal-fired plants were shut for good.

Temporary shutdowns of production started to be enforced in Henan and Shanxi, two leading producing provinces, to reduce high pollution levels. This was first announced by local governors in December 2016, and set the pace for what the sector would increasingly see the following year.

"I have worked in this industry for 20 years, but I have never seen this massive a shutdown," a European trader told Industrial Minerals at the time. Little did he imagine that things were to get even stricter.

In March 2017, Henan province – the main brown fused alumina (BFA) producing area – was placed under severe pollution alert, with industrial electricity monitored by the local authority to ensure emissions were capped. 

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Rio Tinto’s bauxite mining operation in Weipa, Australia
Rio Tinto 

In Shanxi, which holds the bulk of bauxite reserves, coal-powered bauxite calcining operations were stopped for failing to meet energy sourcing norms, while plants in Tianjin were also affected.

By May, only a minority of plants was allowed to continue operating in Shanxi and Guizhou, as most others did not meet the required standards. 

Other mineral sectors were affected as well. Magnesia production in Liaoning province was slashed during inspections, and graphite production in Shandong was also disrupted.

The clean-up efforts on the part of the government expanded to other regions during the summer, and came to affect virtually any industry or sector deemed polluting – including chemical, coking, electroplating, tannery, pesticides and lead-acid batteries.

In the run-up to two main events - the National Games of China in Tianjin and Luoyang, Henan, in September, and the national congress of the Communist Party in Beijing in October - inspections intensified, further curbing output as factories could not operate normally, running only during short windows when allowed or between one inspection and the next.

Tianjin had its own share of trouble. Under the development plan aiming to upgrade the port city, all processing facilities based there had to relocate elsewhere, as was announced last June. As a consequence, plants that could not afford the relocation costs and equipment upgrades simply closed, taking yet another chunk of production off the market.

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South32’s bauxite mine and alumina refinery near Worsley,
Western Australia
South32 

While processing plants could not operate, restrictions to mining were imposed. The use of explosives was severely curtailed in mines across China, leaving miners to rely only on mechanical extraction, with limited output. This affected bauxite as it did magnesia, graphite and other minerals.

And so it went on until the very end of the year, and into 2018.

At the time of writing, a latest period of shutdown remains in place in northern areas including Shanxi and, in central China, Henan. It started in mid-November and will last until mid-March. During this time, all local bauxite calcining kilns are closed, with no raw material to supply brown fused alumina (BFA) producers. 

Several market participants hope that the situation will return to a more manageable level after the Chinese New Year holiday in February. By the second quarter, the Henan shutdown will have expired and some state-controlled suppliers of equipment and explosives are due to return to action, although no exhaustive details have been circulated.

With this plethora of issues, production costs have been ticking up. Energy is, at the moment, a primary concern for companies that are still keen to operate. Due to the mandatory shift in demand from coal, natural gas prices are spiraling out of control.

"The gas price today is three times what it was only a few months ago," a Chinese producer told Industrial Minerals in early January. "This is the leading driver of the increase in costs. In my experience, this price will keep increasing until the government does something about it."

The appreciation of energy costs adds to issues related to the quality of the available bauxite ore. Due to the restrictions at mines, what ore reaches processors is described as having high impurity levels. This all makes for lower quality and more expensive material supplied to market.

Brown fused alumina price (refractory/abrasive, $/tonne, fob China) 
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Source Industrial Minerals 

Fused alumina, white, 25kg bags, CIF Europe, €/tonne 
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Source Industrial Minerals 

Appreciating markets

The combination of mining restrictions, production shutdowns and increasing costs has put market prices on a decisively upward course. 

This has been affecting, in turn, several commodities in the supply chain at different times. From bauxite and BFA at the frontline of the restrictions, the appreciation spread to white fused alumina (WFA), as well as to markets governed by more stable contractual patterns, such as calcined alumina products or hydrates. 

With hindsight, it can be seen how many market participants failed to foresee the scale of the supply squeeze in China, and its drastic consequences on prices. 

Those buyers who, at the sight of the first price upticks, decided to sit it out rather than stockpile material early on, had to bear the brunt of their wait-and-see attitude later on, when they could no longer delay their purchasing and had to pay much higher prices.

Contributing to this was the widespread feeling that, as China had done often before, this would be yet another short-term, opportunistic spree to drive prices temporarily, before they would return to "normal" levels. As it turned out, this was not the case.

As mentioned, during the downturn in steel markets in 2016, prices of several refractory minerals were weak. As of November 2016, refractory grade bauxite 85% was trading at $270-300 per tonne fob China. The grade had been flat for several months up to then, owing to low demand. 

The sluggish price trend continued into the second quarter of 2017, when the inspection efforts on the part of the government, and the clampdown on VAT dodging, gradually started to be reflected in prices.

By mid-June, the grade had risen to $340-350 per tonne, as availability had dramatically reduced. Further volatility was seen in the summer months, until the grade gained a further $100 or so, and toward the end of the year, when 85% material was priced at $450-460 per tonne. In the year to December 2017, the grade had appreciated in price by 60%.

Other calcined bauxite grades performed in an analogous way: 86% material rose to $470-480 per tonne fob China by year-end from $280-300 per tonne in April 2017 (+64%); 87% grade increased by 57% to $490-500 per tonne fob China by December; 88% grade material rose by 48% to $500-520 per tonne fob China in the same period. 

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Ship being loaded at Rio Tinto’s Weipa bauxite operation, Australia
Rio Tinto 

Since mid-summer, availability of high purity grades - especially 87% and 88% - was reported as extremely limited.

As its supply is very closely linked to that of bauxite, and affected by several of the same factors, BFA prices moved almost in parallel to those of bauxite.

In the lull of 2016, BFA refractory grade (min 95% Al2O3, 0-6mm) fell below the $600 mark, to $570-590 per tonne fob China in mid-September. 

At the time, BFA abrasive grade (min 95% Al2O3, FEPA F8-220 grit) was trading at $600-650 per tonne fob China.

Both grades ticked up gradually as the shutdowns capped production output between the end of 2016 and the first half of 2017. This was first seen in abrasive prices, which had risen to $700-750 per tonne by February.

The second half of the year saw a rapid appreciation pattern for both markets, as availability worsened. By end of August, refractory BFA rose to $700-750 per tonne, while abrasive edged further to $780-825 per tonne. Prompted by scarcity, widespread demand and an appreciating Chinese yuan against the US dollar, prices exceeded a two-year high in the fourth quarter.

Into early January 2018, refractory grade BFA hit $780-800 per tonne, and abrasive grade – now reported as extremely thin on the ground – rose further to $870-920 per tonne.

The continuous price pressure on bauxite, and BFA consequently, led to an appreciation of WFA, although this market normally shows less volatility. The uptrend was also due to a hunt for alternative materials by refractories customers. Those who could not secure bauxite or BFA opted for WFA, where possible, in a bid to cover their needs and secure better pricing.

Back in October 2016, refractory grade WFA was trading at €600-650 per tonne cif Europe. The grade gained €100 on both ends by the first quarter of 2017, where it stayed for most of the year, prior to a further appreciation in December to €750-800 per tonne.

New year contracts are being reported as hovering around €800 per tonne cif Europe from some suppliers, although Industrial Minerals is aware that other suppliers are quoting as high as €900 per tonne cif. Chinese-origin material has appreciated the most, Industrial Minerals understands.

Non-Ferrous Metals Alumina Index Fob Australia $ per tonne 
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Source: Metal Bulletin 

In focus: Alumina hydrate

In the alumina trihydrate (ATH) space, market participants active in the United States have reported bullish driving forces, as several suppliers are seeking to put through price increases on 2018 contracts.

Citing higher feedstock costs, US ATH suppliers want to capitalize on high demand and widespread price rises across alumina markets.

Buyers have noted aggressive offers from their suppliers to secure a "sizeable" increase in new contract prices, they told Industrial Minerals in January.

Industrial Minerals assessed damp alumina hydrate (57-60% Al2O3, 5-8% moisture), at $280-300 per tonne ex-works US in January.

Industrial Minerals is aware of at least three sellers that have raised ATH prices for 2018.

Back in December, US-based flame retardant materials supplier Huber Corp said it would increase its prices of ATH and magnesium hydroxide from January.

The increase will affect all grades of ATH and magnesium hydroxide that Huber Engineered Materials, the division handling these ranges, supplies. Huber cited "cost increases in raw material, labor, packaging, regulatory compliance and freight" as its reasons for making the price adjustments.

A second supplier serving the US will also increase its own ATH prices next year, it told Industrial Minerals in December, and a third supplier exporting to the country is doing the same.

This second seller said higher costs for smelter grade alumina (SGA) and energy were driving prices up, as were higher bauxite and caustic soda prices. 

Buyers seem to be taking a cautious stance toward suppliers’ announcements for the time being.

"I haven’t started actual negotiations yet due to the rising market," one ATH buyer told Industrial Minerals at the beginning of January, adding that he could afford to delay his purchasing because the facility had enough stock to run for the immediate term.

"Of course, if you don’t have stocks left and are in need of buying, your position is much more exposed to the price rise," he added.

On the other hand, a second buyer told Industrial Minerals he has chosen to lock in volumes and prices for the full year whereas, under typical conditions, he would buy on spot or on shorter contracts.

"Normally I don’t do yearly contracts but this time we decided to do it," he said, adding that he wanted to counteract a period of volatility that started with the increase in SGA prices in the second half of 2017. 

The market had first expected higher prices in 2016 when two large US production facilities, Alcoa’s Point Comfort plant and Sherwin Alumina’s plant, both closed.

The two sites had combined total capacity for 3.9 million tonnes per year of alumina products although they had been running at lower rates for some time before finally closing.

Although sources at the time reported that "everyone" expected price increases in ATH after the shutdowns, the market remained stable due to a combination of weak downstream demand, high leftover stocks following the closures and a surge in supply from Brazil that avoided a potential shortage of material.

With demand from consumer markets unchanged following the closures, inventories from the two plants that were sold as the operations closed were sufficient to cover any immediate short-term need from users.

Then Brazilian exports stepped into the picture. ATH shipments from Brazil to the US soared from 65,890 tonnes in 2015 to over 241,000 tonnes the following year – a surge of 267%. This avoided a potential shortage, and prevented a price surge.

As for this year, doubts are rife as to how the 2018 bullish phase will play out, with some suggesting that deals being negotiated will be crucial in this respect.

"The duration of new contracts will determine how long the period of high prices will last," one buyer said. "If customers lock in long supply deals, we may be looking at a full year of higher rates."

ATH trading: Brazil takes off on US demand

Brazilian alumina trihydrate (ATH) exports ended 2017 on a high, with shipments reaching 844,982 tonnes in the full year, exceeding volumes traded in the previous two years.

The performance of the Latin American producing country confirms the uptrend in previous reporting periods, which was supported by healthy demand in the US.

Total exports last year generated turnover of $138.98 million, according to Brazil’s customs data.

For comparison, 2017 total exports were 15% above 2016 in volume terms of 737,179 tonnes and up 69% against 2015, when exports were below 500,000 tonnes.

In value terms, 2017 turnover was also higher than both 2016 and 2015 by 18% and 59% respectively. December shipments of Brazilian ATH stood at 50,802 tonnes, with a value of $9.47 million.

The bulk of December demand originated from the US, which stood out as the single largest buyer for the month, taking in 34,910 tonnes. The destination was followed by Argentina at 11,574 tonnes and Japan at 1,355 tonnes.

Increased buying activity in the US in December made the country the leading importer of Brazilian ATH in 2017. Exports to the US alone reached 379,912 tonnes last year, equivalent to a 45% share of total trade.

Japan followed closely at 375,453 tonnes, equivalent to a 44% share. Together, the two importers accounted for almost 90% of Brazilian shipments.

Argentina was the leading buyer in Latin America at 31,653 tonnes in 2017, followed by Mexico at 28,736 tonnes.