Bullish Chinese aluminum boosts alumina imports
China's January-May alumina output falls 6% on year
Significant drop in downstream aluminum demand
The alumina story for the second quarter of 2020 was very much about recovery, propelled by unexpectedly strong Chinese aluminum demand, but the remarkable ascent may not be sustainable as the price of alumina is currently disproportionately high relative to aluminum, and seemingly at odds with the weak global macroeconomic environment, market participants said.
The price of alumina started Q2 on a bearish note, but its fortune reversed two weeks in.
After dropping to a year-to-date low at $224.50/mt FOB Australia in mid-April, also marking a four-year low, the market rebounded for the next two months and for
much of the quarter, boosted by Chinese appetite.
The Platts Australian benchmark ended the June quarter at $261.50/mt FOB Australia, and has since leapt further to $284/mt.
The two-and-a-half month ascent was a surprise to many participants in the market.
The majority of the world was in the grip of the coronavirus pandemic, with nationwide lockdowns in place and the global economy off the rails.
China, on the other hand, was reopening after nearly three months of lockdown, and revving up the local economy.
From April, the Chinese aluminum market became the underlying bull that fueled the price of alumina in China and globally.
CHINESE SCRAP SHORTAGE, PLANT RESTARTS BOOST ALUMINA, ALUMINUM IMPORTS
The front-month Shanghai Futures Exchange aluminum contract price spiked Yuan 2,590/mt ($370/mt) or 23% in Q2 to Yuan 14,070/mt on June 30.
The phenomenal climb began with a shortage of aluminum scrap, which boosted demand for primary aluminum. Some traditional scrap consumers were also drawn to primary aluminum when it became cheaper than scrap.
China's main sources of scrap are Europe and the Americas, and supplies were curtailed due to transportation bottlenecks, border closures, and reduced aluminum recycling activity due to COVID-19 restrictions.
These developments led to a spike in primary aluminum consumption in China as a substitute for scrap aluminum.
The country's high primary aluminum stockpiles accumulated in Q1 soon dwindled in April.
Additionally, the country's aluminum consumption also increased with the restart and ramp up of downstream processed aluminum plants post-COVID lockdown.
Strong Chinese aluminum prices pulled up domestic alumina prices, and fueled appetite for imported alumina.
SHFE ALUMINUM FAR STRONGER THAN LME ALUMINUM
Initially, London Metal Exchange aluminum was in total disconnect with the bullish Chinese aluminum market. With the rest of the world still reeling from COVID-19, LME was weak.
Then China began importing significant volumes of primary aluminum as well, and eventually LME values also rebounded in June.
The LME continued to lag the SHFE's strength, but did gain material ground.
Western smelting margins were, however, not remotely close to the fat margins that Chinese smelters were enjoying.
As for alumina, global margins were borderline decent but not comfortably wide.
"It [the alumina price] does seem a bit all over the place at this time," an international trader said.
"Such conflicting data in the market at present. Some sentiment seems bullish, but the actual physical metal market looks soft. The SHFE price is confusing to me," he added.
DISCONNECT BETWEEN ALUMINUM RISE AND WIDER ECONOMIC ENVIRONMENT
Market participants anticipate that in the short term, the price of alumina may continue to be supported. The underlying factor for this is China's aluminum output has been growing much faster than its refining rate.
According to National Bureau of Statistics data, China's metal output climbed more than 2% year on year between January and May to 14.81 million mt, while its alumina output declined 5.8% over the same period to 28.93 million mt.
Moreover, China has another 1.15 million mt/year of new smelting capacity slated to come online between July and September.
But for the longer term, market participants said they would be surprised if alumina and aluminum didn't come under downward pressure.
They voiced an uneasy sense of disconnect between the very bullish Chinese aluminum market and wider macroeconomic environment, and indicated that there may be potential downward pressure to come, for metal and alumina prices.
In China and globally, industrial activity is materially compromised, unemployment rates historically high and rising, and consumer confidence low.
On the one hand, Beijing and other governments across the globe are stepping up economic stimulus plans, with big infrastructure and construction projects. But are these going to be enough to carry the momentum in the alumina and aluminum markets?
Industry sources noted that the whole aluminum value chain has contracted. The reality is that there is a significant drop in downstream demand caused by the COVID-19 pandemic, with factory orders not only canceled, but order renewals not coming in either, sources said.
Joanna Lim, Melvin Goh
