When Rio Tinto chief Jean-Sebastien Jacques takes Queensland Premier Annastacia Palaszczuk on a tour of his Weipa bauxite empire on Tuesday, he might be tempted to repeat the cliche about the region turning into "the Pilbara of bauxite".
But one of Australia's top experts on bauxite – a bulk commodity that is refined to make alumina which is then smelted to make aluminium metal – says Mr Jacques will be wrong if he makes such a claim.
"Guinea has become the Pilbara of the bauxite sector, not Weipa," said Alan Clark, managing director of the CM Group which publishes the CBIX bauxite price index.
"Guinea is the bauxite hot spot and the Chinese are really viewing it as their long-term supply source. China's largest coastal refiner, Weiqiao, is addicted to Guinean bauxite and more will follow, it is coming out of the country at quite a rate."
Since it became clear that China's fleet of alumina refineries would not be able to source all of their bauxite from Chinese mines, several countries have loomed as Australia's biggest rival supplier of the bulk commodity.
First there was Indonesia, then Malaysia, but both had their potential capped by export restrictions designed to protect local jobs and the environment respectively.
Guinea has become the latest challenger to Australia's market share, and in recent times the West African nation seems to be winning.
Exports from Guinea to China have surged from 0.37 million tonnes in 2015 to more than 30 million tonnes in 2017.
In 2018 Guinea is expected to ship more than 44 million tonnes of bauxite to China.
Oversupplied
That extraordinary surge will be the dominant force behind a 7.3 per cent rise in global bauxite production this year, and the bosses of major Australian bauxite miners unanimously believe the bauxite market is now oversupplied.
"Whilst Chinese demand is growing, the production and the export from Guinea into China is also growing quite significantly now Guinea has overtaken Australia as a principal exporter to China," said Mike Ferraro, the chief executive of Alumina Limited, which has interests in bauxite mines in Western Australia and Guinea.
"We expect that oversupplied market to continue into next year as well."
Prices for the bulk commodity were fetching about $US49 per tonne in recent days, well below the $US78 per tonne they were fetching in 2014.
Mr Clark reckons Guinea is set to continue growing bauxite exports aggressively.
"There is a lot of investment going in now and there will be more over the next couple of years," he said.
"It has the potential to double from about 50 million tonnes per year to over 100 million tonnes of export capacity over the next five years."
None of this is news to Rio, which despite being focused on Queensland and Northern Territory bauxite exports also owns 22.95 per cent of the same Guinean bauxite mine that is part-owned by Alumina Limited – Sangaredi.
Expanding into an over-supplied market
But the oversupply of bauxite does pose awkward questions for Rio, as it contributes $US300 million ($410 million) to expansion of its Guinean mine, and continues spending $US1.9 billion expanding its Weipa operations into the Amrun bauxite deposit.
Prioritising "value over volume" has been one of Mr Jacques' most frequently stated strategies since becoming chief executive of Rio in 2016, yet from early 2019 exports from Amrun will likely deepen the oversupply of bauxite headed for China.
Rio said earlier this month that Guinea's rapid rise was changing perceptions around the bauxite market.
"There are significant uncertainties around the direction of the bauxite market primarily due to the recent and substantial growth in bauxite mine capacity in Guinea and uncertainties regarding the impact of supply reforms under way in China," said Rio on August 1.
When asked to elaborate on those comments, Mr Jacques said Amrun remained an attractive project despite the over-supply and the uncertainties.
"What we are highlighting is that more and more bauxite is moving from Guinea back to China. It is still early days, and what we are highlighting here is that there is a lot of volatility, what we don't know going forward is whether the bauxite market will be priced on the cost-plus or on commercial terms between Guinea and China," he said.
"Let's be clear, we have no doubt that the investment in Amrun, that should come on stream next year, is a good investment. It is a very good investment for us; it will be a world-class asset."
When asked if Rio might struggle to find a home for the 10 million tonnes of extra bauxite that Amrun will put into the market, Mr Jacques was adamant the product would be well received.
"Do we have any concern today about our ability to place the growth element of Amrun when it comes on line? The answer is absolutely no," he said.
"What is important is to focus on having the right cost structure, the right quality of product, the right relationship with our customers, so whatever market conditions we are in, whatever volatility in the marketplace, then we will continue to be profitable."
Like Rio, Alumina Limited believes the oversupply of bauxite will become a shortage within five years, meaning the long-term fundamentals of the industry remain solid.
"Post-2022, China will be importing significant amounts of bauxite in addition to the 80-odd million tonnes it is likely to import this year," Mr Ferraro told The Australian Financial Review.
Mr Clark agrees that the long-term fundamentals are good for bauxite producers, saying the volume of Chinese alumina production reliant on imported bauxite could double over the next eight years.
Flight to quality
But Mr Clark also believes product-quality issues could cement Guinea as China's favourite bauxite supplier.
"Although it [Rio's Queensland bauxite] processes well, it is high-silica bauxite and therefore consumes more caustic soda when processed into alumina," he said.
"Toward the end of last year the caustic soda price in China almost doubled, so if you do a value-in-use analysis based on higher caustic soda prices, then Weipa bauxites with around 6 per cent reacting silica aren't as attractive as Guinean bauxites, which typically have less than 2 per cent reacting silica. The processing costs are significantly lower.
"At higher caustic soda prices, it's more important to have lower silica than higher alumina, because it is a much bigger cost driver."
Caustic soda accounts for about 17 per cent of alumina refining costs, according to data published by Alumina Limited last week.
South32 mines bauxite with low silica content but also low alumina content south of Perth, close to where Alumina Limited and its partner Alcoa mine the same material.
The vast majority of the bauxite mined in that part of Australia is refined into alumina before it leaves Australia.
But Alcoa and Alumina Limited have in recent years started exporting a portion of their raw bauxite.
South32 could theoretically join its neighbours in exporting bauxite, but chief executive Graham Kerr said it was not a particularly appealing opportunity.
"I think people get overly excited about bauxite, I think there are very few deposits in the world that long term, the economics will stack up to actually send it on a ship," he said.
"The notion for bauxite in its own right to be shipped out of the south-west of Western Australia, I struggle with personally because of the grade. The grade is much lower than what you see come out of Guinea or Queensland."
Modest bauxite prices of late aren't the only thing turning the likes of South32 away from the export market. Prices for alumina have surged close to all-time highs in recent weeks on supply disruption.
Surging alumina prices
So will bauxite producers start holding back some of their bauxite and chase higher margins by turning it into alumina before selling it?
"At current alumina prices, the temptation is to say unequivocally yes, but it's not that simple," said Mr Clark.
"Both markets look attractive over the long term so why not compete in both? The challenge is to understand both markets, then develop a strategy that fits with both, based on a set of unique assets. No doubt there will be a different answer for every company."
For South32, conversion to alumina is definitely the most attractive use for bauxite.
"I would say alumina produced out of Australia's south-west is incredibly competitive against both those sources [Queensland and Guinea bauxites]," said Mr Kerr.
"If you have the right bauxite deposit and the right refinery that is how you make the biggest margin.
"We are starting to see freight [costs] creep up in a meaningful way, and if you think about the ratio of bauxite to alumina to aluminium, if you are shipping bauxite across the world it is becoming a lot more expensive than it was six to 24 months ago."
Like Rio, Alumina Limited looks set to play both sides of the fence; producing enough bauxite for their alumina refineries, but also selling some bauxite on the side.
"We make sure we have sufficient bauxite to run our refineries at full capacity and only after that, and taking into account our assessment of our long-term resource base, do we make bauxite available to third-party markets," said Mr Ferraro.
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