Pent-up demand amid virus outbreak to support near-term alumina price rally

SHANGHAI, Feb 6 (SMM) – An imbalance emerges in China’s alumina market as the coronavirus outbreak deters the release of downstream demand while the market appears to be well-supplied. 

Alumina supply in China is currently in a slight surplus, SMM assessed based on the production and net imports. This, together with limited production cut at alumina refineries, keeps suppliers and buyers cautious about quoting given uncertainties of the recovery of the logistic amid spread of the virus. 

Inventories at alumina plants and ports are higher than pre-holiday levels on the back of shipment curbs. On the demand front, most primary aluminium producers still have some feedstock stockpiles as they restocked before the CNY holiday. But the continued restrictions on motor transport and the slow speed of rail shipment may see the near-term restocking demand unable to be met. 

Aluminium smelters that had new capacity online or failed to store up enough feedstock for the holiday are running out of raw materials stocks. Some smelters in Henan said their inventories may only be able to meet production demand for less than five days. 

SMM sees a rally in alumina prices in the next two weeks on the back of elevated demand from aluminium smelters amid logistics controls. The continuity of the price increase will be determined by the impact of any changes in transportation policy on alumina production cuts and the raw material inventory levels at aluminium smelters. 

Production of alumina in China barely felt the impact of the coronavirus outbreak in January, a SMM survey showed. China produced 5.56 million m of metallurgical-grade alumina in January, with daily output of 179,000 mt, down 1.12% on the month and 9.36% on the year, according to SMM data. 
Major producer Guangxi Xinfa reduced its annualised capacity in operation to 1.8-2 million mt in late-December on market factors, and this accounted for the smaller daily production of alumina in January. 

Lower prices of bauxite and alkali reduced costs of alumina in January, which combined with higher prices of spot alumina, narrowed losses at domestic producers. But this failed to trigger significant capacity resumption at alumina refineries that previously cut or halted production, due to bauxite shortage (as seen in Chinalco Huaxing), and environmental production curbs in heating season (Henan Zhongmei, Luoyang Wanji). Large-scale producers such as Jiaokou Xinfa also have no plan to resume operations. 

According to SMM data, China’s primary aluminium output stood at 3.07 million mt in January (it consumes 1.935 mt of alumina to produce per mt of primary aluminium). SMM estimates a net import of alumina of 400,000 mt in China last month, which resulted in a supply surplus of 13,000 mt. 

Alumina refineries in North China, such as Henan, Shanxi, Shandong and Inner Mongolia, have been most affected by the epidemic. 

Supply of domestic bauxite has been disrupted by transportation restrictions and extended holiday at some mines. This made alumina mills in Henan and Shanxi, especially those without mines and produce primarily under high-temperature lines, difficult to secure raw materials with falling inventories. 

On the supply of seaborne bauxite, cargoes unloading at ports continues, but shipments from ports face restrictions. Some primary aluminium producers in Inner Mongolia and Shanxi are currently grappling with lower inventories of imported bauxite. 

The delivery of caustic soda and lime, another feedstock for alumina, has been curbed. Trans-provincial procurement by alumina refineries in Henan and Shanxi was in low efficiency. Producers in Shandong that are close to the main production areas of caustic soda and lime are well-supplied under normal transportation. Alumina mills in Henan that purchased lime from Hubei face lower stocks of lime, as the procurement has been disrupted after the virus outbreak. 

Most coal mines in Shanxi and Shaanxi will resume production after February 9. Coal shipments from ports also run into headwinds, which has seen three large-scale alumina producers in Shandong and Shanxi partially suspending the roasting capacity due to coal supply shortage. 

Shipments of alumina by railroad continue, but automobile transportation is restricted. Information on delivery from Shandong, Shanxi, and Henan provinces should be reported a day before the shipment, as local governments move to control the impact of the virus. 

Despite a price rally of alumina, limited availability of vehicles and drivers weighed on the shipping efficiency and added to the pressure of finished product inventories at some mills.  

The impact of the virus outbreak on capacity adjustment at alumina refineries is detailed as follows. 

Shanxi province

Huaqing Aluminium scaled back production at the beginning of the CNY holiday on the back of tight supply of coal. Its operating rate has slipped to around 70%. Reduced inventory of bauxite and caustic soda weighed on the operating rate at Aokaida to 70-80%. Xing'an Chemical halted production of a low-temperature line with a capacity of 650,000 mt/year, as disrupted motor transport from port lowered its stocks of imported bauxite. Shortage of coal and caustic soda has prompted Xiaoyi Xinfa to move feedstock from Jiaokou Xinfa, and shut down a roaster at the same time. 

Shandong
Chiping Xinfa is currently in full production, but has planned to cut output given the lower inventory of coal. 

Henan
The overall capacity in operation is roughly unchanged from the pre-holiday level. 

In Southwest China including Guizhou, Guangxi, and Chongqing, alumina plants keep their capacity in operation flat from end-January. Feedstock inventories are able to meet production demand as the virus impact on local transportation was limited. Some firms, such as Chongqing Bosai, saw their inventories of finished products higher than the pre-holiday level amid slow shipments. Jingxi Tiangui started batch charging to produce aluminium hydroxide in mid-January, and did not generate finished products of alumina in January. Its alumina output in February will depend on the production of aluminium hydroxide.

The capacity of metallurgical-grade alumina under operations declined to 64.41 million mt/year as of early February, with the virus outbreak affecting 1.8 million mt/year of capacity (including the impact of the shutdown of roasters). SMM estimates China’s production of metallurgical-grade alumina at 5.12 million mt in February, with the daily output falling to 176,000 mt. 

SMM assessed domestic production of primary aluminium at 2.88 million mt in February (it consumes 1.935 mt of alumina to produce per mt of primary aluminium). Net imports of alumina are estimated at 350,000 mt in February, leading to a shortfall of alumina supply of 85,000 mt. 

Spot prices of alumina in China edged higher from the levels before holidays, with small scale transactions, SMM assessed as of February 6. There were two deals for seaborne materials, with prices at $299.5/mt cif Qingdao port/Bayuquan and $280/mt fob. Cargoes will be shipped from Western Australia for March delivery.