abare.gov.au - Australian commodities – June quarter . volume 15 . number 2 2008

Aluminium

In the first five months of 2008, the price of aluminium averaged around US$2800 a tonne. Aluminium production in a number of countries was disrupted by power shortages, contributing to concerns about current and future aluminium availability and resulting in rising prices since late January.

Prices rising in 2008 and 2009

The world aluminium price is forecast to average US$2830 a tonne in 2008, 7 per cent higher than in 2007, and production of aluminium is forecast to increase. However, disruptions to power supplies are resulting in slower aluminium production growth than previously anticipated.

Prices are forecast to rise by a further 13 per cent in 2009, averaging around US$3200 a tonne. Further increases in aluminium production capacity are not expected to be sufficient to meet demand and stocks are forecast to decline to around 4.2 weeks of world consumption.

Aluminium prices are expected to remain above the historical average of around US$2200 a tonne, reflecting partly increasing production costs and partly higher demand for aluminium as incomes rise in emerging economies, especially China and India.

Consumption growth still driven by developing economies

World aluminium consumption is forecast to increase by10 per cent in 2008, to 41.0 million tonnes and by a further 8.7 per cent, to 44.6 million tonnes in 2009. China continues to drive world aluminium consumption growth, accounting for more than 20 per cent of world consumption in 2007. The United States accounted for a further 13 per cent of world consumption.

Rising incomes and continuing infrastructure development in China are forecast to result in domestic consumption growth of 25 per cent in 2008 and 18 per cent in 2009. However, rapid expansion of aluminium smelting capacity in China is forecast to be insufficient to meet the increase in domestic demand in both years. As a result, China is forecast to be a net importer of aluminium in 2008 and in 2009.

In the United States, monthly total motor vehicle assemblies fell below 10 million in March 2008, for the first time since August 1994. In April, assemblies fell further and with a continuing weak US economy, this number is expected to decline further in coming months. The residential housing market is also expected to remain subdued. Although there was a small increase in both housing permits and starts in April, aluminium demand from the residential construction sector is not expected to rise until 2009. However, US aluminium orders for products including pipes, plate and coil, used in transport, automotive and consumer goods manufacturing, have been higher in the first five months of 2008 compared with the same period in 2007. Domestic consumption in 2008 is expected to be similar to 2007, because lower consumption is forecast for the remainder of 2008 associated with weaker growth in the US economy.

Production affected by power supply problems

World aluminium production is forecast to increase by 9 per cent in 2008, to 41.4 million tonnes. Aluminium production was disrupted by power shortages in a number of countries in early 2008.

In China, aluminium production in 2008 is forecast to increase by 18 per cent, compared with growth of 32 per cent in 2007. Severe snow storms in China in the first quarter of 2008 affected coal supply and reduced electricity supply as generators were forced to shut down. As a result, some aluminium smelters are operating below capacity or have stopped production altogether. The earthquake in mid-May further reduced the potential for increase in China’s aluminium production in 2008. A number of smelters scheduled to commence production in the remainder of 2008 have been delayed because of damage caused by the earthquake. Some new smelters, although not directly affected, may still experience problems starting production on schedule if electricity constraints persist because priority is likely to be given to existing operations.

In South Africa, continued power shortages have led to BHP Billiton’s Hillside and Bayside smelters operating at only 90 per cent of capacity (around 94 000 tonnes below capacity). With the potential for electricity shortages to persist at least in the short-term, there is a possibility South African aluminium production will be further reduced.

Dry weather in New Zealand has also reduced the availability of hydroelectric power to Rio Tinto’s Tiwai Point smelter. As a result, capacity utilisation at the smelter has been reduced by 10 per cent (a loss of around 35 000 tonnes in 2008).

More broadly, uncertainty regarding the implementation of climate change response policies in a number of countries is delaying investment decisions by aluminium companies. The availability of reliable and relatively low cost energy is important to aluminium producers. In countries such as Australia, the details of proposed emissions trading schemes are yet to be finalised and as a result, aluminium producers have delayed decisions regarding new builds or expansions indefinitely.

In 2009, world aluminium production is forecast to increase by 7 per cent, to around 44.3 million tonnes. Further increases in China’s capacity are expected to result in domestic production growth of more than 11 per cent.

Large new smelters scheduled to begin producing in 2009 include Hydro’s Qatalum in Qatar (capacity of 585 000 tonnes a year) and UC Rusal’s Boguchanskaya in the Russian Federation (capacity of 600 000 tonnes a year). Venalum is also expected to complete its expansion of the Puerto Ordaz smelter in Venezuela (additional 140 000 tonnes a year).

Alumina and aluminium outlook

2006

2007

2008-09

% change

World aluminium

Production

38 082

41 380

44 312

7.1

Consumption

37 225

40 982

44 567

8.7

Closing stocks

3 448

3 847

3 592

– 6.6

– weeks consumption

4.8

4.9

4.2

– 14.3

Price

US$/t

2 639

2 832

3 213

13.5

USc/lb

119.7

128.5

145.7

13.4

World alumina

Spot price

US$/t

341

418

433

3.6

2006

2007

2008-09

Australia

Production

Bauxite

62.7

63.2

63.5

0.5

Alumina

18 506

19 382

20 664

6.6

Aluminium

1 954

1 962

1 963

0.1

Exports

Alumina

15 056

15 733

16 835

7.0

– value

A$m

6 243

5 811

6 982

20.2

Aluminium

1 638

1 682

1 689

0.4

– value

A$m

5 650

5 023

5 639

12.3

f ABARE forecast. s ABARE estimate.

Australian aluminium production to remain largely unchanged

Australian aluminium production is forecast to be 1.96 million tonnes in 2007-08 and 2008-09. No additions or expansions to Australia’s aluminium capacity are expected over the outlook period, pending finalisation of the details of an emissions trading scheme. However, small increases in production are expected as efficiency improves at existing smelters.

Australian aluminium export earnings are estimated to have declined by 11 per cent in 2007-08 to $5.0 billion, reflecting slightly higher export volumes but lower export prices. In 2008-09, export volumes are forecast to remain around 1.7 million tonnes. However, export values are forecast to increase by more than 12 per cent to $5.6 billion, in line with higher world aluminium prices.

Alumina

The majority of world alumina sales are on a contract basis (where the contract price is usually linked to the aluminium spot price) or accounted for as internal transactions in vertically integrated companies. Remaining alumina is sold on the spot market, usually to Chinese aluminium smelters. As a result, alumina spot prices tend to reflect the availability of alumina spot sales and not necessarily movements in aluminium prices.

In 2008, the alumina spot price is forecast to average around US$418 a tonne, 23 per cent higher than in 2007. Demand for alumina from aluminium producers has been strong, therefore increasing the alumina spot price. In addition, rising costs of alumina production, particularly the cost of electricity, have supported these price increases. The alumina spot price is forecast to average around US$430 a tonne in 2009.

Alumina production is expected to increase in 2008 as new projects and expansions in Brazil, China, the Russian Federation, Kazakhstan and Jamaica commence and projects that commenced in 2007 increase production toward capacity. This is forecast to result in alumina production rising by 7 per cent in 2008, to more than 85 million tonnes. Production is forecast to increase by a further 7 per cent in 2009 as additional projects in China and Global Alumina’s Sangredi Refinery in Guinea (capacity of 3.2 million tonnes) commence.

Australian export volumes rising

Australian production of alumina is estimated to have increased by around 5 per cent in 2007-08, to 19.4 million tonnes. This reflects the completion of part of the 1.8 million tonnes a year capacity expansion at Rio Tinto’s Gove refinery, as well as moderate production increases at other Australian refineries, such as Worsley and Chalco.

Production is forecast to increase by a further 7 per cent in 2008-09 as construction is completed at Gove. However, there is some uncertainty around this growth, reflecting disruptions to Western Australia’s gas supply because of a fire at the Varanus Island gas plant. As a result of these disruptions, Alcoa has declared force majeure on its alumina contracts but is yet to announce the effect of the disruptions on production.
In line with increased production, alumina export volumes are estimated to have increased by around 4 per cent in 2007-08, to 15.7 million tonnes. However, the value of exports is estimated to have declined by 7 per cent as a result of lower export prices in the second half of 2007 when the aluminium price fell.

Australian export volumes are forecast to rise by a further 7 per cent in 2008-09 as alumina production increases. With both increased volumes and higher spot alumina prices, the value of Australia’s alumina exports is forecast to rise by 20 per cent to $7.0 million.