Expecting a World Surplus Despite Temporary Production Cuts in China

KEY MESSAGES

ALUMINA

1. Australia alumina spot price inches up amid news of temporary production curtailments in China. Prices stand at $383 per mton FOB, up 6% m/m. Meanwhile, alumina spot prices in China are up 14% m/m to $404 per mton (ex-works and excluding VAT) mostly on news of at least 5.0 million mtpy of temporary production capacity curtailments as the government has ordered inspections on various refineries due bauxite residue leaks. However, our intel suggests curtailments should last about one month.

2. However, Alunorte full restart has been confirmed as production embargo has been lifted. As expected by HARBOR, Hydro has announced that its Alunorte refinery will start to fully ramp-up alumina production after the Federal Court in Belem lifted the refinery's production embargo which was under the criminal lawsuit. The 6.4 million mtpy alumina refinery is expected to be running at 75%-85% of capacity within two months, up from the run-rate of 50% it has been operating since March 2018 (when Brazilian environmental authorities ordered it to curtail output on concerns of a leak from bauxite residue deposits). The court's decision follows the lift of another embargo under a civil case made on May 15.

3. Inspite of temporty production curtailments in China, HARBOR still expects global alumina production to expand sharply amid production gains in ROW and China new projects. We continue to see a growing world alumina surplus in the 2019-2022 period. The market surplus in this period could average 5.5 million mton per year and would be the result of alumina production growing faster than demand (5.0% compared to 4.0%), especially due to expansions in China, the United Arab Emirates (EGA's refinery), Greece (Mytilineos' expansion), Jamaica (JISCO's Alpart expansion), India (Nalco and Hidalco's brownfield expansions, and possibly Vedanta's), and Indonesia (Nanshan Group). We expect China’s alumina market to structurally shift to a self-sufficient/surplus from 2020 on, with exports depending on price arbitrage opportunities.

4. As we have been mentioning, the full restart of Alunorte reinforces our bearish view on alumina prices, as the world alumina market is set to shift to surplus. Alumina spot prices should continue with their downward trend and fall to as low as $270 per mton at some point in the next 12 months. With the restart of the Alunorte refinery in Brazil and production expansions in China and the Middle East, the world's alumina market is expected to switch to a surplus of 2.9 million mton in 2019 (from a deficit of 0.4 in 2018).