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Ore to feed the Red Dragon

Despite China’s economic slowdown, it has retained its appetite for bauxite to feed its alumina and aluminium needs.

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China’s appetite for bauxite ore, refined alumina and aluminium products remains gargantuan. The People’s Republic accounted for 47% of world aluminium output in 2016, up from around a quarter a decade ago. The country’s top producer, China Hongqiao, is the world’s biggest maker of aluminium.

The rapid growth in the sector has boosted Chinese demand for bauxite, with China’s total imports at 52 Mt in 2016, compared with 20 Mt at the start of the decade – although volumes fell around 7% over the year. UK consultancy firm CRU forecasts that global alumina capacity will grow by around 30% to 178 Mt by 2024, driven in a large part by China’s craving for aluminium.

As the powerhouse of this global growth, China continues to drive demand through infrastructure projects, particularly from the rail and power sector, and urban development. Metals analysts at Standard Chartered Bank note that Beijing’s current Five-Year Plan supports sustained development of infrastructure activities this year, although a decline in the property sector could slow the speed of activity. China’s need for bauxite to feed its alumina refineries is expected to underpin a 15-year boom for a growing range of exporters of the ore, says CRU.

But overcapacity in China’s aluminium production sector remains a concern for Beijing and global markets, as it has in other industries, from steel and coal to ship and equipment manufacturing. Although the rapid expansion of aluminium production in China has flattened at a record 31.6 Mt over the last two years, it is double the output of 2010. And, as in the steel sector, oversupply in the Chinese aluminium industry has meant a flood of exports, depressed global prices and closures for smelters in other countries. Standard Chartered observes that new smelters in China continue to outpace the closures of capacity outside China.

In the air

The trigger for the reduction of the pace of the output could come from environmental pressures, rather than domestic oversupply or the international fallout from a surfeit of exports. The Chinese Ministry of Environmental Protection is considering winter shutdown of 30% of aluminium smelting capacity, around 10 Mtpa, and half of alumina refining in Shandong, Shanxi, Hebei and Henan Provinces, in order to cut air pollution. These four provinces account for a fifth of global aluminium output and 75% of China’s alumina. UK-based CRU believes that this would require 650,000t more imports of alumina next year.

The major change for the aluminium market came at the start of the year, with the decision by Indonesia to ease its 2014 ban on the export of bauxite and other ores. Three years ago, Jakarta imposed the moratorium to spur its alumina refining sector and the growth of higher-value smelting industries in Indonesia. Southeast Asia’s biggest economy has faced growing budget deficits and lower revenues, how ever, prompting the U-turn.

Bambang Gatot, director general for minerals and coal at Indonesia’s Energy Ministry, indicated in January that the government would keep close control of volumes, which would be limited to high aluminium oxide content (at least 42%).

With Jakarta expected to slowly ease the ban on bauxite export through 2017, Indonesian producers have major ground to recoup. The source of 70% of bauxite imports (50 Mtpa) in China before 2014, Indonesia’s mines have cut production from 55.7 Mt in 2013 (second only to Australia) to 2.6 Mt in 2014, and 1 Mt in 2016, according to US Geological Survey (USGS) data.

China has steadily increased its bauxite production to 65 Mt in 2016 from 47 Mt in 2014. The news is positive for Chinese aluminium producers, says consultancy company Roskill, with downward competition among other suppliers and downward pressure on commodity prices.

Leviathan ride

Analysts at CRU expect Malaysia to ease its self-imposed ban on bauxite mining, introduced last year, although Kuala Lumpur extended the moratorium in December for another three months. China initially turned to Malaysia, where miners, capitalising from Indonesia’s retreat, hiked up bauxite production to 35 Mt in 2015 from 3.3 Mtpa earlier. Malaysia continued to sell stockpiles to China last year, with nearly 3 Mt still left around Kuantan in the state of Pahang in December. Although Malaysian exports to China fell by 69% last year, shipments still amounted to 7.5 Mt, according to China Customs. The USGS estimates that production amounted to 1 Mt last year.

The export ban in Indonesia and Malaysia has helped rapid growth for bauxite projects in Australia and Guinea. The moves to lift bans will create further competition as the South East Asian suppliers try to wrestle back market share from Australian producers, which have been the main beneficiary. Bauxite exports from Australia soared to 23.2 Mt in 2016, of which 21.3 Mt was destined for ports in China, up 8.8% from the previous year. Despite the growth in bauxite exports from Australia, CRU analysts have raised their concern over issues including gore quality and transport costs.

Australia has continued to expand its bauxite production, exceeding 80 Mt in 2015, with an estimated 82 Mt expected in 2016, according to latest USGS data. Anglo-Australian miner Rio Tinto is the leading bauxite producer ‘down under’, producing 47.7 Mt of bauxite in 2016, just above its target, which was a 9% increase from 2015. Australian mines hit an annual production record, with Weipa in Queensland up 6% and Gove in the Northern Territory up 21%. Chinese demand drove up shipments to third parties by 10% to 29.3 Mt in 2016, while fourth quarter shipments were up 12%.

Far-flung shores

In January, Rio Tinto began work on a new bauxite mine in Cape York, with plans to supply China. The new US$2B development, known as the Amrun Project, is expected to mine 22.8 Mtpa of the aluminium ore when it opens in 2019, with a view to later doubling production to 50 Mtpa. Rio plans for production at Cape York to replace the nearly depleted East Weipa mine and boost overall bauxite exports from Weipa by 10 Mtpa. Rio Tinto’s bauxite production in Gladstone and Weipa accounts for 10% of the world’s aluminium.

China has also looked to Guinea as an alternative main supplier of bauxite, alongside Australia. Shipments from the West African state to China amounted to 11.9 Mt in 2016, up from just 300,000t in 2015 and negligible volumes in 2014, according to China Customs data. Guinea has now usurped Malaysia as the second main supplier to China after Australia. Ron Knapp, secretary general of the International Aluminium Institute (IAI), conjectures that shipments could surpass Australia in 2017. With global aluminium producers requiring 45-50 Mt more bauxite supply by 2020, the IAI views Guinea as a vital new source.

China Hongqiao Group has made rapid progress with its 2014 deal to secure the expansion of Guinea’s bauxite mining and export capacity. The group agreed with the Government of Guinea to lead a US$200M development of its mining and port facilities. Through its wholly owned subsidiary Shandong Weiqiao, Hongqiao started shipping bauxite weekly from the mines and port of Katougouma in Guinea to Yantai and its plants in Shandong province. The Chinese group has export facilities with a capacity to handle 15 Mtpa and a target range of 10-30 Mtpa, although CRU analysts expect 12 Mt this
year.

Guinea exchange?

China has diversified its bauxite suppliers following the Indonesia and Malaysia bans. Guinea and Brazil have emerged as major suppliers alongside Australia. Guinean exports to China look set to remain high. However, despite its 7.4 Bt of known reserves representing around a quarter of the world’s total, Guinean bauxite is low quality. Chinese buyers are looking elsewhere for higher grade ore. Brazil is already a source, with 4.4 Mt shipped to China last year, almost treble the amount exported in 2015 – although it is the world’s third largest producer with 34.5 Mt in 2015. West Africa’s Ghana is another, with 1 Mt exported to China in 2016, up 45%, and with investment underway to secure more (see page 19).

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