Alumina prices rose to unprecedented levels this week, putting pressure on the margins of aluminum smelters around the world. The London Metal Exchange (LME) recorded a closing spot price of $633.35 per metric tonne for alumina on Wednesday.
This price increase has pushed the alumina/aluminum price ratio to nearly 25%, a significant increase from the 15% ratio at the start of 2024, when alumina was priced at $350 per tonne.
The surge in alumina prices is attributed to a series of supply disruptions throughout the year. Recent export problems in Guinea, a major bauxite supplier to China, triggered the latest rise. Bauxite is the main ore for the production of alumina. The physical alumina market is tight, and the Shanghai Futures Exchange (ShFE) has seen a speculative frenzy, further fueling the price rise.
On Wednesday, ShFE recorded a record trading volume of almost 25 million tonnes on its alumina contract, or around a fifth of global annual production. Investors have actively participated in this market, as evidenced by record levels of open interest over the life of the contract. In response to the speculative activity, the exchange increased trading limits and margins on Thursday, adding a premium on speculative positions over industrial hedge positions.
China’s dependence on Guinean bauxite grew, particularly after environmental inspections limited domestic supplies and an early export ban from Indonesia was put in place. of 2023. Guinea’s role as China’s main bauxite supplier has grown, with imports doubling between 2000 and 2023, with a further increase of 13% in the first eight months of this year.
The alumina market has faced multiple supply challenges. Alcoa Corporation (NYSE:) announced the permanent closure of its Kwinana refinery in Australia, with the closure expected to be completed by the third quarter of 2024. Rio Tinto (NYSE:LON:) declared force majeure on Queensland refinery deliveries in May due to gas capacity restrictions. Century Aluminum (NASDAQ:CENX) was briefly affected by Hurricane Beryl in September, and South32 (OTC:SOUHY) expressed concerns about Australian operations due to environmental regulations.
Despite these disruptions, China’s domestic aluminum production increased 4.4% year-on-year in the first eight months of 2024. The country has managed to maintain alumina supplies, even becoming a net exporter to Russia, with exports increasing by 41% year-on-year from January to April.
However, the availability of alumina on exchanges like the ShFE is not as robust, with inventories having more than halved since June, leading to a premium for spot contracts over futures contracts. The actual impact of recent disruptions in Guinean bauxite shipments remains to be seen, but the market reaction time has shortened due to the influence of the Shanghai futures contract. This has introduced a new level of volatility to the alumina market, which could potentially affect aluminum prices in the future.
Reuters contributed to this article.
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