SHANGHAI, Jul 20 (SMM) - Currently speaking, domestic and overseas alumina prices are moving toward different directions with domestic alumina outperforming, while the cost has been high. In addition, supply-demand balance in south and north China has been reversing, which is expected to ease the oversupply situation in the second half. Therefore, SMM expects that the domestic alumina prices will fluctuate around the cost level.

Domestic and overseas alumina prices move toward different directions with domestic alumina outperforming

In China, spot alumina prices fluctuated greatly in the first half of 2022. At the beginning of the year, due to the production reduction caused by environmental protection restrictions and the impact of the Winter Olympics, alumina prices entered an upward channel, and then fell again in March before moving in a narrow range. Entering April, the supply-demand relation in south and north China gradually balanced from the previous shortfall in the north and oversupply in the south. Both north and south-west markets have been self-sufficient in terms of alumina without considering the supplementary of imports. Therefore, the alumina price spread between south and north will narrow, and the alumina prices are expected to hover around the local cost level.

Overseas, global geopolitical risks continued to rise since February, and the resulting surge in energy prices strongly supported LME aluminium as well as alumina prices. And with the shutdown of overseas alumina refineries, the reduction in supply further boosted alumina prices. In April, after Australia banned alumina exports to Russia, this part of sources flowed into the market, easing the supply tightness, and the prices dropped.

Alumina oversupply in China may ease

Domestic alumina capacity has been on the rise. According to SMM survey, as of July 2022, domestic installed alumina capacity reached 94.25 million mt, up 6.4% YoY, after excluding suspended capacity that has no resumption plans in the foreseeable future. According to SMM data, there are around 10.127 million mt of excess alumina capacity in China. In the second half of this year and the next three years, there are will be nearly 13.8 million mt of new capacities ready to commission. As aluminium capacity has almost touched the ceiling, domestic alumina is completely self-sufficient.

In terms of import and export, the import volume of alumina continued to decline from January to May, and the overseas supply and demand balance as well as the resource flow changed as well. On the one hand, the demand for Chinese alumina is stable in Europe. On the other hand, the prices of imported resources and sea freight remained high. Coupled with factors such as the increase in domestic supply and the shrinking of downstream profits, some customers with rigid demand have turned to domestic sources.

Meanwhile, the production of aluminium has also risen this year. Alumina supply surplus is estimated at 763,000 mt throughout 2022 as alumina export has been robust since the second quarter, indicating a tight supply-demand balance. The pessimism of the substantial excess of alumina supply shall ease slightly.

The cost has been high amid tight domestic ore supply and robust demand for imported ore

The cost of alumina comprises bauxite, caustic soda, energy, and other expenses. The cost of bauxite accounts for nearly half of the total cost, followed by energy and caustic soda. Since the beginning of this year, the proportion of bauxite has remained high, the proportion of caustic soda continued to rise, and the proportion of coal declined slightly.

At present, the supply of domestic bauxite remains tight. And coupled with Indonesia’s frequent mentioning of bauxite export ban, some domestic enterprises have increased the use of domestic bauxite. The overall market tilts toward the sellers, and the prices of domestic bauxite are mainly running in a narrow range with momentum. Overseas bauxite prices are also high due to the surge in domestic demand for overseas ore, and the increase in sea freight.

In addition, since the second quarter, the prices of domestic caustic soda have also shown an upward trend. Therefore, the profit of the domestic alumina continued to decline in the first half of this year due to the constant rise in raw material prices and the fall in domestic alumina prices. The industry still has certain profitability, but more refineries are suffering losses with rising operation risks in light of high cost, alluding potential production cuts or suspension at any time.

The alumina prices will hover around the cost amid the replacement of new and old alumina capacity

The existing new capacities are being into production in an accelerated manner. Most of the new factories are built around the port, and the purpose is to reduce the domestic transportation cost of using imported bauxite. Under such a large-scale commissioning of new capacity in the future, high-cost enterprises will face great pressure. In particular, the cost of refineries in Shanxi and Henan could hardly rival those in Shandong, Guangxi, and Hebei. Hence it is expected that in the second half of the year, high-cost production capacity will gradually withdraw from the stage or slowly relocate to coastal areas. Therefore, the alumina price spread between south and north will narrow, and the alumina prices are expected to hover around the local cost level.

It is worth noting that alumina prices are still subject to a series of uncertainties including the commissioning progress, aluminium production situation, the SHFE/LME price ratio changes, prices and supply of raw materials, as well as the potential black swan incident.

Overseas, with the rise in overseas energy prices, the reduction in overseas aluminium production has led to a decrease in alumina demand. With the release of new alumina capacity in China, domestic aluminium smelters will shift their focus from overseas products to domestic ones. In addition, China is also transforming from a net alumina importer to a net exporter. Overseas prices are expected to fall with the absence of cost support.