China's raw material imports for the primary aluminium sector are clearly shifting from alumina to bauxite in response to the explosive growth in domestic alumina production capacity.
The country's alumina production surged 54% year-on-year to 10.745 million tonnes in Jan-Oct and since October's production marked a 60% year-on-year increase, the acceleration looks set to continue.
With limited domestic bauxite resources, the country is becoming more dependent on imports. At 8.012 million in the first 10 months of this year, they were up by 413% year-on-year and were already more than three times higher than those over the full 2005 calendar year.
Indonesia is the primary source of that bauxite, imports from the country totalling 7.341 million tonnes in Jan-Oct. However, Malaysia has also started to appear as an origin country in the last couple of months with imports of 48,132t in October bringing the year-to-date total to 149,860t. Sporadic imports from Australia and India have also taken place this year and all the signs are that there is going to be something of a bonanza for regional bauxite producers in the months to come.
Imports of alumina, by contrast, have started to slow. At 5.714 million tonnes in Jan-Oct they were down by 0.8% year-on-year. That may not sound like a big change but it is in comparison to the 15% increase over the course of 2005.
In fact, we strongly suspect that alumina import figures would be lower still were it not for long-term contracts running to the end of this year. The spot market for imported alumina seems to have been moribund in recent months with quoted prices softening accordingly. The latest indication we've seen is material trading at around $220 (duty unpaid), which is a long way from offers of $650 seen in the first quarter of this year.
Price War?
Indeed, there seems to be something of a price war underway in China itself with the new crop of alumina producers undercutting the two previous dominant players in the country—national favourite Chalco and trade house Minmetals. The former's official selling price (duty paid) is 2,400 yuan per tonne (around US$306), compared with a recent Q2 peak of 5,650 yuan.
Independent players, though, are said to be offering alumina at 2,200-2,250 yuan per tonne and the local betting is that it's a matter of time before Chalco responds with what will be its fifth price cut in as many months.
That gives some idea of the seismic shift that has taken place in a short period of time in China's raw materials dynamics.
The question is: how long is this sustainable? US producer Alcoa presented earlier this week its analysis of the Chinese market's dynamics and one of the points it highlighted is the questionable sustainability of an alumina industry that has no captive bauxite resource (with the notable exception of Chalco itself).
The bull rally in the alumina price was driven by China's apparently insatiable demand for the raw material. The rush by local players to meet that demand has already killed off the bull market but how much damage will be done to alumina prices before some of those new Chinese producers get caught in a margin squeeze between a falling alumina price and a rising imported bauxite price?
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