Rio Tinto targets longer alumina position with asset sales

If and when Rio Tinto manages to sell all of the 13 assets it put up for sale on October 17, it will have divested itself of around 2 million tpy of primary aluminium production capacity, and given itself a substantially longer position in alumina than in aluminium.

“Being long in bauxite and alumina is part of our strategy,” a Rio spokesman told MB, though he added that the company is investing heavily across the value chain.

But those investments will not alter the alumina/aluminium balance in the primary metal’s favour.

The $2.5-billion modernization of Rio’s Kitimat smelter in Quebec will boost production to 420,000 tpy from 282,000 tpy, but upgrades at the Yarwun alumina refinery will take that facility's production to an expected 3.4 million tpy of alumina on 2012 from 1.3 million tonnes in 2011.

The company is not alone in seeing value further upstream on the production chain, which has been illustrated in the initial reaction to Rio’s announcement.

Among the producers polled by MB, the interest in the Australian assets put up for sale – which include the Bell Bay, Boyne and Tomago smelters – confined to the Gove bauxite mine and alumina refinery.

“I was expecting, after a few days, to hear what our people are thinking about Gove,” a source from a large, integrated producer said. “The Gove refinery would be a good asset for someone like us.”

Others have already made strides towards a longer alumina position. Following Norsk Hydro’s acquisition of Vale’s upstream aluminium assets in Brazil in February the company will soon be twice as long in alumina as in aluminium – a situation that Hydro was aiming for with the purchase.

“In general, we believe we have a very attractive bauxite/alumina position over the long term,” a source from Hydro said. “We’re long in bauxite and long in alumina, and we’re very pleased with that move from a strategic point of view.”

Even among those integrated companies that aim simply to cover their own alumina needs, such as United Co Rusal, people are beginning to see the benefits of having a long position in alumina.

“The Rusal strategy is to make sure we are self-sufficient for our own needs,” a Rusal source said. “But a long alumina position adds value to big companies.”

BHP Billiton is also getting longer on the alumina side. In the third quarter, BHP Billiton produced 1.06 million tonnes of alumina, up 6% from the corresponding quarter last year. Over the same period, the company’s aluminium production remained flat at 315,000 tonnes.

Alumina producers have long wanted the pricing of their product to be delinked from LME aluminium prices, which has always tied the profitability of alumina to the aluminium price. Index-based pricing was established last year, with MB launchings its fob Australia alumina index in August.

With alumina prices no longer priced solely as a percentage of LME aluminium prices, the market is able to operate more conventionally, with its own fundamentals more prominent in its pricing.

“The changes regarding pricing are catching on, with the move away from the LME prices and towards the index,” a producer source said. “I believe in the alumina market and its fundamentals going forward.”

A second producer source agreed, saying that there is now significantly more value at the intermediate stage of aluminium production, as the latter stages are becoming increasingly more expensive.

“When you look at the numbers, and at the return of possible investments in the future, these companies are positioning themselves more competitively,” he said.

“Smelting is a tough business, and the older assets are the most expensive.”