Is Aluminium Pivoting Towards A Structural Bull Market?

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While demand for aluminium is on a tear due to disruption and power-related restrictions, there’s growing concern that a breakdown in the supply of bauxite from Guinea could lead to a deficit

-Jury’s out on whether bauxite supply can sustain Guinea’s military coup
-ANZ sees the global aluminum market recording a major deficit in 2021
-Citi’s base-case is for cash aluminum price to repeat all-time highs of mid-2008

By Mark Story

A string of Chinese supply challenges together with a constrained physical market beyond China, plus rising energy prices, have culminated in the London Metals Exchange (LME) cash aluminum prices hitting ten-year highs of US$2,777/t on September 9th, after rallying 40% from the start of 2021.

While the strong price rally over the past year, broadly in line with the global cyclical upswing, would typically unwind owing to a supply response, Citi believes the constraint in aluminum supply is sufficient to sustain higher prices for years to come.

ANZ Research estimates that over 1m tonnes of aluminium smelting capacity were curtailed in second quarter FY21 due to China’s aluminum smelters being hampered by power restrictions. However, ANZ notes the bigger impact on output is yet to come, with plans for new capacity in Yunnan now expected to come online more slowly than originally forecast.

Beyond China, other supply issues include structural damage to one of Alcoa’s ship unloaders at its Alumar refinery in Brazil which is forcing a reduction in alumina output to about 7,000 t/day. Then there’s Jamalco, an alumina plant located in Jamaica operated by Noble Group, which sustained damage in a major fire on 23 August.

Guinea Uncertainty

Political unrest in Guinea has also significantly heightened the risk of disruption to the output of bauxite, the key feedstock in the production of aluminium. However, Citi has not identified any firm impact on Guinea’s bauxite exports, given that the leader of the military coup has urged miners to operate as usual and suggested he will honour existing mining agreements and re-open ports.

However, ANZ Research notes that while Guinea’s pipeline of bauxite-related projects is solid – with the potential to expand output by at least 50% over the next three to five years – the risk of disruption to future supply is thought to be high. ANZ reminds investors that Guinea supplies China – the world’s largest aluminium producer — with nearly half of its bauxite imports.

ANZ notes since buying 2% of Guinea’s exports in 2015, China consumed around 15% in 2020, and suspects that could rise to 60% by 2040. But while Guinea was expected to overtake Australia as the world’s largest bauxite supplier by 2022, ANZ believes the coup raises serious doubts over how many of the planned projects will come to fruition.

With India’s aluminium industries also suffering from a surge in power demand, ANZ sees the global aluminium market recording a deficit in 2021 of around 750kt.

Meanwhile, Citi has revised down global aluminium demand growth to better reflect the recent slowing down in Chinese economic growth and global supply chain challenges. However, the broker believes bullish supply impacts outweigh the bearish demand factors.

As a result, Citi has updated supply/demand balance estimates to reflect a significantly larger global deficit in 2021 than the broker had previously projected.

Due largely to a series of Chinese supply losses, Citi envisages 2021’s global deficit reaching 1.1mt and foresees China’s refined aluminium output rising 3.8% year-on-year in 2021, lower than the earlier projected 6.6% year-on-year increase.

Citi expects supply issues to persist, resulting in 2022/23 projected global deficits bigger than previously projected.

As a result, Citi’s revises up aluminum price forecasts to an average of US$2,475/t in 2021 and US$3,010/t in 2022 and expects spot aluminium prices to nudge US$2,900/t in 0-3 month and US$3,100/t in 6-12 months.

Citi’s base case, to which the broker attributes 60% indicative probability, is for the LME cash aluminium price to repeat its all-time highs of US$3,271/t reached in mid-2008 and for real “all-in” aluminium prices to hit cyclical highs of US$3,464/t by 2023.

Citi also expects existing and anticipated supply disruptions – plus rising bauxite and caustic soda prices — to help keep alumina prices, (Australia FOB) which have surged US$20/t since late August to US$322/t, at elevated levels during the remainder of 2021. The broker has revised up alumina price forecasts to an average of US$310/t for third quarter 2021 and US$340/t for fourth quarter 2021.

After simmering away for the past few weeks, Shaw and Partners notes that alumina prices rose 15% on 9 September, which the broker notes, adds to the price inflection off $300/t on 1 September.

The price lever aside, Shaw notes that over the past six months the alumina price has been tracking the China import parity price higher, and expects freight charges to at some stage see the alumina price (ex-Australia) up $20-25/t. The broker also expects the near-term inflection to be the latest supply curtailment challenge.

While Shaw is not advocating a price spike similar to that experienced in 2018-19 – following a partial closure at the world's largest alumina refinery – the broker will be watching the price response closely.

Meanwhile, Shaw has a Buy or both Alumina Ltd ((AWC)), target price $2.20, and South32 Ltd ((S32)), target price $3.60, with the broker adding that the latter gets even more sizzle with met coal at an all-time high.

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