The world alumina trade is in for some radical changes, writes Kunal Bose. The historical practice of deriving the price of white powdery chemical fed into aluminium smelter from the LME price of the non-ferrous metal is giving way to index-based pricing already in vogue for iron ore. The move has merit as index-based pricing should more appropriately reflect the value of the mineral and alumina than is the case now, according to Norway headquartered global aluminium group Hydro covering the entire value chain from bauxite mining to production of rolled and extruded aluminium items.
The transition to the new pricing structure has begun. But it will take some time before alumina index-based pricing becomes the industry rule finding universal acceptance among buyers. The success of such pricing is underpinned by Alcoa, the world’s biggest producer of alumina and at the same time largest maker of the white metal in the US, pushing it successfully as it concludes contracts for its 2011 volume using a monthly average of a basket of different indexes to better reflect underlying costs. In the processes of doing this, Alcoa is ensuring that one index does not find favour over another. The alumina industry traditionally has multi-year supply contracts with about 20% of the volume signed and repriced each year.
Industry officials have come to agree with Alcoa chairman Klaus Kleinfeld that unlike a percentage of LME prices, the index- based pricing system not only more closely reflects the cost structure of alumina production embracing all cost components but it will also reflect the chemical’s short-term volatility. The new pricing will take its time to ‘ripple through the system’. A change of the fundamental kind that index-based pricing represents will take its time to get converts across the buying community. “But I think the customer understands why a change like that is needed. Because frankly, alumina has very different cost drivers from aluminium,” according to Kleinfeld. The pricing model that Hydro is envisaging will be a mix of LME, index pricing and to a larger degree the costs in the bauxite and alumina value chain.
In a research paper ‘New global bauxite & alumina business,’ Hydro says the world demand for aluminium will rise from 41mt (million tonnes) in 2010 to 59mt in 2015 and to 74mt in 2020. Interestingly by 2020, China and the rest of the world will each need 37mt of the metal. As aluminium finds increasing application in transport, construction, packaging and aviation sectors, going forward the world will see the integrated metal and also standalone alumina producers engaged in an increasing contest to acquire cost-efficient bauxite deposits. Hydro itself has made significant acquisitions of bauxite and alumina assets in Brazil making the company fourth in the world in terms of alumina volume brought to the market.
The Hydro paper says 66% of bauxite reserves are found in three countries. At the top of the heap is Guinea with 14.9bn tonnes of reserves (mine site resources and undeveloped resources) and 4bn tonnes of potential reserves. Australia has reserves of 9.5bn tonnes and potential reserves of 5.9bn tonnes. As for Brazil, it is 8.2bn tonnes and 2bn tonnes, respectively. No wonder then China, which has developed a ravenous appetite for alumina to feed its still burgeoning aluminium capacity will be aggressively scouting for bauxite reserves in Australia and Indonesia, independently and also through joint ventures as it opens up new mines in its own land despite deterioration in the quality of domestic resources. International Aluminium Institute says that aluminium production in China, the world’s biggest producer and consumer of the metal, rose to 16.131mt last year from 12.964mt in 2009 when a combination of the memory’s severest global recession, domestic energy ration and Beijing edict on phasing out of polluting smelting capacity reined in output. China made 13.105mt of aluminium in 2008.
The world has been taken by surprise the rapidity with which China has been building alumina refining capacity and boosting bauxite mining in the upstream to cut dependence on imports both for the chemical and the mineral. According to IAI, the Chinese alumina output sprinted to 28.071mt in 2010 from 22.895mt a year earlier and production still continues to rise. The country produced 11.2mt of alumina in the first four months of 2011, up 12.4% on a year-on-year basis. This is enabling China to do with less and less imports of alumina. Between January and April, Chinese alumina imports were down 52% to 831,203 tonnes.
The Chinese alumina prices have turned soft since March with surge in domestic production. This is leading local merchants to wonder if they should not take advantage of arbitrage with world prices commanding a premium and start exporting. Brokerage house Cofco Futures says the ramping up of alumina production may allow traders to do “a few export deals. But local surplus will not grow big enough to make China a net exporter of alumina.” Discussions on exports have made it to centre stage. But what needs to be reckoned are the Chinese ‘logistical constraints’ in sending out alumina in large quantities to the world market. Being a big importer of the chemical over many years, the Chinese infrastructure is tuned to receiving ships loaded with alumina in a sandy form and the material is then transferred to silos near port areas pneumatically. However, the way local refineries handle alumina in either containers or 1.5-tonne bags will not be found logistically friendly for export.
China has been found to be feeding new refineries with increasing quantities of locally mined bauxite. In a confirmation the Hydro paper says Chinese bauxite sourcing from domestic mines will rise to 73mt by 2015 from 37mt last year. During this period, bauxite imports too will climb to 42mt from 30mt. The Chinese refining capacity has so developed as to make the country ‘relatively balanced in alumina’. Alumina imports by Chinese smelters with their capacity approaching 25mt will range from 4mt to 5mt. Indonesia alone has a share of around 75% of bauxite that China imports with Australia being the source of supply for most of the remaining amount.
A point of concern for Chinese alumina makers is the Indonesian government’s growing discomfort with large-scale exports of bauxite. Djakarta has let it be known that bauxite miners are not to be allowed to harm environment in any way while they must ensure the safety of mine workers. Tightening of mining regulations is not, however, discouraging Chinese groups from acquiring assets in the archipelago on their own or come into exclusive buying arrangements with companies from other countries engaged in mining in Indonesia. For example, Hillgrove Resources, the Australian mining group, which has acquired 70% ownership of five companies owning nine bauxite exploration licences over Landak and Tayan bauxite projects spread over 1,400km2 in West Kalimantan province of Indonesia will be using the assets to meet Chinese demand. The licences are all next to large bauxite mining operations and reports say resources in licence areas are gibbsite in nature with low reactive silica levels. Indonesia’s bauxite deposits are more than 1bn tonnes.
In line with Chinese moves to secure resources from Australia ranging from iron ore to coal to bauxite, the government-owned Aluminium Corporation of China, popularly known as Chalco, is to invest $2.5bn to develop 7.5mt-capacity bauxite mines in Aurukum region in northern Queensland. A Confederation of Indian Industry official says,“China so far has played a stellar role in resource diplomacy in the world. This is as much in evidence in Australia, notwithstanding the 2009 collapse of Chalco’s Rio Tinto deal, and Indonesia as in African continent. Chalco also wanted to build an alumina plant in India with linkages to bauxite deposits. Maybe it will be giving India a try once again in future.”
In the meantime, China has been buying alumina from India’s largely government owned National Aluminium Company, which sells the chemical through tenders. Out of NALCO’s alumina production of 1.556mt in 20010/11, exports amounted to 686,000 tonnes compared with 1mt a few years ago. Alumina surplus for exports is falling as NALCO by way of capacity addition ramped up metal production to 443,597 tonnes last year. Hindalco, an integrated aluminium group, raised production of alumina to 1.353mt last year from 1.3mt in 2009/10 through brownfield mines expansion. In the meantime, Vedanta Aluminium, which is running a refinery and a smelter in the eastern Indian state of Orissa, has not yet been able to get all government clearances to start mining at Niyamgiri hills.
India, which is in the mid league of bauxite resource owning nations, has proven reserves of 1.6bn tonnes and potential reserves of 0.4bn tonnes. Experts,
however, say more extensive exploration using satellite mapping will lead to new findings of reserves. Bauxite in India is mostly found in Orissa, Andhra Pradesh, Jharkhand and Gujarat and companies from within and outside the country are keen to get mining rights. Indian states without exception want value to be added locally to bauxite by way of production of alumina and aluminium. At the same time, the federal and state governments want to be assured before considering applications for lease ownership of deposits and mining rights that the applicants will adequately compensate the villagers to be displaced and ensure their proper rehabilitation. India’s forest and environment regulations have also become strict.
Cape Alumina agrees deal for bauxite mine
ASX-listed Cape Alumina has finalized agreements with the Cape York Aboriginal land owners for the proposed Bauxite Hills mine and port project, in Queensland, clearing the way for a large-scale exploration and drilling programme to start later this year.
The bauxite developer said that exploration consent and compensation agreements were signed between the company and the Apudthama Land Trust in May this year.
Acting CEO Neville Conway noted that these agreements were a “major milestone” in the project’s development, and was further evidence of the positive relationship that existed between Cape Alumina and the Aboriginal people of western CapeYork.
“We are extremely pleased that these agreements with the Apudthama Land Trust have been finalized and that the Bauxite Hills project can now progress to the next stage of development,” Conway said.
The Bauxite Hills project area is 95km north of Weipa, and a concept study has showed that the project could potentially yield between 50mt (million tonnes) and 100mt of dry product bauxite, which would sustain a 15-year export operation.
“Starting later this year, we will undertake an advanced exploration and drilling programme to establish a Joint Ore Reserves Committee resource and start environmental studies of the area, before moving to the feasibility stage of the project,” said Conway.
He noted that the mine and port project could generate more than A$1-billion in economic activity in Queensland and produce significant social benefits for the indigenous people.
“This project has the potential to be a significant economic asset not only for Queensland but for the entire country, and would give a much-needed boost to the western Cape York region.”
Smelter shutdowns mean Brazil will probably need to start importing from 2012
Increased output is allowing Brazil to keeping pace with buoyant demand for bauxite and alumina. But high energy prices means no new smelters are planned, and two have shut down in the past 12 months, writes Patrick Knight.
With world demand for aluminium growing strongly and with output of bauxite being stepped up, Brazil will export more than 10mt (million tonnes) of bauxite this year, a third more than the 7mt shipped out from mines in the Amazon region in 2010.
About 100,000 tonnes more alumina, 2–3% more than in 2010, will take the total shipped this year to about 6.5mt. Several new alumina mills are under construction and older ones expanded, so more alumina will soon be available as well.
Demand for aluminium products will grow by at least 12% in Brazil this year, slightly less than in 2010.
But with two medium-sized mills shut down in the past 12 months, about 80,000 tonnes less primary aluminium will be made in 2011 than the 1.53mt of 2010.
As a result, about 100,000 tonnes more primary aluminium will have to be imported this year than the 37,500 tonnes imported in 2010, while up to 30,000 tonnes less primary aluminium will be exported this year as in 2010 as well.
The high cost of electricity means no new smelters are being built, or are even at the planning stage in Brazil at the moment.
If it were not for the fact that a Brazil recycles a higher proportion of the aluminium used in the country each year than any other country, notably with 98% of the 200,000 tonnes used to make cans each year now being recovered, the situation would be even more critical.
Much of the half a million tonnes of primary aluminium to be exported this year, 100,000 tonnes less than was shipped each year between 2002 and 2009, is subject to long-term contracts, so exports will continue for some time yet.
But with no additional primary aluminium to be produced this year than in 2010, Brazil will become a net importer of the metal in 2012 and will continue to import more each year for the foreseeable future.
The countries leading producer,Votorantim Metals, previously the Brazilian Aluminium Company, CBA, has always made a point of being as close to self-sufficiency in electricity as possible. The company now generates 80% of the electricity it uses from the 33 small power stations it has built near its mills.
While electricity is responsible for about 35% of the cost of producing aluminium in most countries, it forms 50% of the cost of producing the metal in Brazil. But the government has been deaf to appeals for costs to be lowered in recent years.
Votorantim Metals, which now exports only 20% of output, rather than the previous 40%, says it would produce more if it were able to generate more electricity. But growing restrictions in the greater Sao Paulo area where its smelters are located, makes this difficult.
Alcoa, which has invested US $1.6 billions on new power plants in the past few years, and which now generates 70% of all the power it needs, is keeping a foot in the door as far as building new smelter is concerned.
Alcoa is a shareholder in the large Belo Monte, 11,000MWs capacity power station being built in the Amazon region. Belo Monte is close to where the great majority of Brazil’s reserves of bauxite, the world’s third largest, are located and is also within easy reach of Alcoa’s own alumina and aluminium mills. So Alcoa may eventually add extra smelting capacity, if it can arrange a favourable supply deal. Brazil needs to produce at least 5% more electricity each
year to keep pace with demand. With abundant supplies of natural gas to come on stream
later this year, a new generation of gas-fired plants will be built in the next few years.
A sharp reduction in the cost of wind power is also attracting new investors to this industry, while the sugar and ethanol industry is also replacing or up-grading elderly boilers, so will be able to generate much more electricity from sugar cane waste than the mills need themselves from now on.
All these trends will result in much more electricity being produced in the south east, close to where it is needed. This in turn means it is becoming less attractive to bring electricity up to 2,000km from the Amazon region, where most of Brazil’s unused hydro potential is located. Transmission lines up to 2,000km long cost as much to build as the power stations themselves, while maintenance costs are high and losses in transmission are considerable.
This may allow some of what is generated there to be sold relatively cheaply to consumers near where it is produced. This happened when the first generation of Amazon power stations were built 20–30 years ago, which allowed Vale, Alcoa and the then Alcan to build and operate the Albras and Alumar smelters.
Last year, the 70,000 tonnes capacity Valesul mill close to Rio de Janeiro, previously owned by Vale, which sold all its assets in the aluminium complex to Norsk Hydro in 2009, was finally shut down. The 60,000-tonne-capacity Aratu mill in Bahia state, now owned by the Indian controlled Novelis company, which bought the assets of Alcan in Brazil last year, has also been shut down, being too high cost to survive.
If investments in primary aluminium are at a standstill, demand for all types of products are growing much faster in Brazil than the economy as a whole.
Notably in the construction industry, the motor industry, for packaging and the transmission of electricity. Encouraged by this, all the companies in the aluminium industry are stepping up investments in processing facilities to meet the extra demand.
Demand for beverages was so great in Brazil last year that despite 25 billion cans being made, about 1.5 billion cans had to be imported. Imported cans cost 50% more than those made in Brazil, causing an executive to remark that importing empty cans is “like importing air”, so extra can making capacity is being added as fast as possible.
The Brazilian economy grew by a record 7.5% in 2010, while aided by a sharp rise in imports and easier access to credit, consumption increased by 12% or so.
All of the leading markets for aluminium, packaging, the motor industry, and for civil construction, grew far faster than the average, in response to the fact that the rate of unemployment fell to less than 6%, allowing average wages to rise, while access to credit was made easier.
Demand for aluminium windows and other extruded products used in most new buildings increased by close to 30%, while about 3.5 million vehicles were sold in Brazil last year, 10% more than in 2009 and double the number made in 2005.
The average Brazilian car contains only 80kg of aluminium, half the equivalent used in cars made in the United States or Europe. But with fuel prices rising and with the government planning to tax vehicles according to their efficiency, rather than size in future, there will be a premium for lower weight. So the aluminium content of vehicles is expected to grow fast from now on. Buses and trucks already use large amounts of aluminium in bodywork, which reduces the cost of fuel and results in vehicles lasting longer, while the trade in value of such vehicles is much higher than average.
This is encouraging industries such as pulp and paper and sugar, where transport costs are substantial, to switch from steel to aluminium bodied trailers, even though they cost more initially.
Restrictions on smoking in public places means more beer is being consumed in the home, most of it from aluminium cans rather than at bars and restaurants, where returnable glass bottles are still the norm.
With three large new power stations under construction in the Amazon region, 2,000km from where the power will actually be consumed, demand for aluminium cables and other items is expected to soar to 100,000 tonnes a year in the next few years.
Output at the three bauxite mining complexes in the Amazon region responsible for virtually all exports, the 30-year-old Trombetas mine owned by a consortium of companies, the Paragominas mine, opened by Vale, but now part of Norsk’s portfolio, and Albras’s massive Juruti mine, alongside the Amazon river itself, and accessible to large vessels, are all stepping up production to ensure that customers around the world, where an average 3.5% more aluminium has been used in the past few years, have access to all the bauxite they need.