Commodities | Aug 14 2006
By Chris Shaw
Merrill Lynch, Deutsche Bank and UBS are among the brokers to have recently cut their price forecasts for alumina as China’s expanded production capacity means it is moving closer and closer to self-sufficiency in that market, which implies a loss of more than 4m tonnes in imports between now and 2008.
It is a view echoed by management at Alumina (AWC) in comments following the company’s recent profit result, which showed earnings increasing to $260m for the June half, up from $163.3m in the same period last year.
China’s alumina demand is estimated to be growing at 16% annually, meaning total demand should more than double by 2015. This is the good side of the equation, the bad side being domestic production capacity increased by 45% in first half this year, reducing the country’s reliance on imports.
Overall, the alumina market is expected to record a slight surplus this year of around 265,000 tonnes, with Brazilian mining company Companhia Vale do Rio Doce (CVRD) estimating global output this year will be 71.63m tonnes, up from 66.589m tonnes last year. It estimates production should increase by as much as 20% over the next three years, though ongoing demand strength should see any surplus remaining below 1m tonnes annually during that period.
But even if China does cut its alumina imports by as much as 4m tonnes between now and the end of 2008, it remains committed to importing large amounts of bauxite, the raw material that is refined into alumina and then smelted in aluminium.
This is good news for the major bauxite producing nations around the globe, which include Australia as well as Jamaica, Guinea, Brazil and China. Guinea is now becoming the focus of attention in terms of exploration, as it is here where there remains the best potential for significant large scale discoveries to still be made. This is due to a combination of both a lack of exploration there in the past as well as the potential for the West African nation to hold as much as 30% of the world’s reserves.
BHP Billiton (BHP) is understood to have indicated at the recent Diggers & Dealers conference in Western Australia it has made a sizable bauxite discovery there, while recently the Guinea government granted exploration permits for bauxite (and iron ore) to Mitsubishi and CVRD, the latter company announcing its intention to spend up to US$12m on exploration in the region over next 3-5 years.
Others are already active there, with the Russian giant Rusal, the world’s third largest aluminium producer, recently announcing plans to add a fifth boiler at its Friguia bauxite and alumina project. The move would assist in achieving the company’s plan to double output from the project by 2008 from current level of 600,000 tonnes of alumina and 2.8m tonnes of bauxite annually.
Alcan and Alcoa are also active there, having majority control of Compagnie des Bauxites de Guinee (CBG), which produces 14m tonnes of bauxite annually, 12m of which is exported. The two companies have recently been granted approval to add a refinery to their operations, suggesting the outlook for bauxite demand continues to look positive.
No one knows when the current resources boom will end, but the recent trend towards lowering price forecasts suggests the previous optimism where prices were consistently being revised higher has come to a halt, at least temporarily. When such an outcome is matched by companies such as Alumina pointing to the potential for weaker demand for output it is probably a time for caution, but those still wanting exposure could look to materials such as bauxite where the supply/demand balance remains in favour of demand.