LONDON (Reuters) - Shortages of alumina, the raw material for producing aluminum, may become more severe in the coming months as an environmental crackdown in China is due to shut capacity, forcing smelters to scramble for supplies and pushing up prices.
Alumina prices have already shot up 73 percent since May and could see further gains, but they are likely to ease early next year as Chinese refineries resume output again following the winter shutdowns at the same time new operations elsewhere ramp up.
“There’s this perfect storm in alumina. There’s been soaring sentiment ahead of the winter cuts,” said Anthony Everiss, senior consultant at CRU.
China has imposed its most stringent ever measures on heavy industry to cut pollution during the peak winter season, including on aluminum and alumina plants.
In the run-up to the winter cuts, alumina buyers were mainly focused on the cuts at aluminum smelters, rather than on alumina refineries and on mines that produce bauxite, said Ami Shivkar, senior analyst at Wood Mackenzie.
Some smelters reckoned that with lower aluminum production, there would be a surplus of alumina, depressing prices, so they held off buying, she said.
But bauxite mines were unexpectedly swept into the shutdowns, creating a domino effect on the supply chain.
“The smelters were running down their inventory, but they were completely blindsided by the fact that there were inspections of the bauxite mines,” Shivkar said.
As refineries ran short of bauxite Henan province started cutting alumina production two months ahead of schedule.
Reflecting the shortages, Chinese bauxite imports surged 46 percent in August while those of alumina soared 123 percent.
The alumina price, based on Metal Bulletin’s fob Australia index, has soared 53 percent to $469.74 a tonne over the last two months to the highest level since the index was launched in August 2010.
“I think there is still some rally left,” Shivkar said. “All the Chinese refineries don’t have the amount of bauxite they want and smelters are still stockpiling.”
CRU estimates that the winter shutdowns will cut Chinese alumina output by 1.2 million tonnes this year while JPMorgan pegs it at 1.5 million.
“But there’s still risk of additional closures. Some of the cities in Shanxi province weren’t on the list and Shanxi has a lot of alumina refineries,” Everiss said.
Unconfirmed reports have said that cuts will be imposed on the cities of Jinzhong and Luliang, the latter which has 12 million tonnes of alumina capacity, he added.
Environmental departments in those cities could not be reached for comment on Thursday.
While alumina prices are expected to hold at elevated levels until the spring, after the winter cuts are lifted in mid-March, they are due to decline, analysts said.
Alumina refineries can restart more quickly than aluminum smelters, while new alumina plants outside of China are due to further increase global supply.
Next year Emirates Global Aluminium is due to launch an alumina refinery with 2 million tonnes annual capacity while PT Well Harvest Winning Alumina is expected to double capacity at its Indonesian refinery to 2 million tonnes.
The latter is a joint venture between Indonesian conglomerate Harita Group and China’s Hongqiao Group.
“Given that this is the only commodity where there is significant ex-China supply preparing to enter the market, we find the bullishness in prices lately short-sighted and retain our downside call for alumina,” Macquarie said in a note dated Oct. 10.
Additional reporting by Tom Daly in Beijing; Editing by Greg Mahlich and David Evans