Cracks in raw material supply chain of aluminum production
Nov 15, 2017

China's winter heating season has arrived, the aluminum market is still difficult to understand the impact on China's aluminum output.

The government will improve the air quality around Beijing, and of course, it will shut down some capacity for this purpose. But some illegal production capacity has been shut down, and the unaffected domestic capacity may increase production, and taking these offsetting factors into account will make it extremely difficult to make accurate calculations.

The London Metal Exchange (LME) three months aluminum is currently trading at around $2120 per ton, a distance from the five year high of 2215 earlier this month, there are still some distance. This suggests that the market should take a slightly relaxed approach to the upcoming cuts, especially considering the rapid rise in inventories on the Shanghai futures exchange. Now, however, attention is turning to the impact of winter industry capacity cuts on key raw materials in aluminium production, especially alumina and carbon anodes. The price of the two has jumped recently, and it has become a hot topic in Oman's discussions last week, whether on the stage or under the table.

London aluminum prices have risen nearly 25% so far this year. Alumina jumped nearly 50% to about 465 dollars per ton. Alumina is the main metal raw material used in smelting. Alumina also responds to the prospect of a large number of closed production capacity in China's fog and haze areas. Given the metal chains in the supply chain, no one knows how much the alumina production will decrease in the winter heating months. At the same time, alumina demand is also a function of the smelter's operating rate, embedded alumina prices between two known unknowns. Until recently, the price volatility of alumina was an important issue for aluminum smelters, even though it and electricity were one of the most important costs of refineries.

This is because most of the refinery's alumina supply contracts are linked to the price of the original aluminum, at least in other countries outside china. As Ali Al-Baqali, the vice CEO of Bahrain aluminum, said in ARABAL, "this is a natural hedge.". And now the natural hedge is no longer there.

Under the leadership of AA.N (Alcoa), aluminum smelting has almost eliminated the linkage between alumina and aluminum pricing in the past five years. According to Alcoa's third quarterly earnings report, about 85% of its third alumina sales are now priced in some alumina price index. The same is true of most other aluminium producers. In this way, the global aluminum industry has lost control of one of the most important production costs. In theory, aluminum producers can use CME's new alumina futures contract to hedge exposure. But in fact, the liquidity of these contracts is too poor to wholesale hedge. One contract has no trading at all, another contract linked to Platts Australia's alumina price index, since the launch last year, the cumulative turnover was only 541 thousand tons.

The London Metal Exchange (LME) is committed to studying the possibility of alumina contracts, but the problem for LME is that the aluminum industry itself has not yet set an indicator price. Aluminum smelters usually make the purchase of alumina contracts in proportion to three different price indices, which makes it very difficult to make simple hedging.

Time bomb of carbon anode system

No aluminum can be produced without alumina, and no carbon anode can produce aluminum. According to Harbor Aluminum Intelligence senior consultant Robert Dickie, "there is no viable alternative to carbon anodes."". Carbon anodes are produced from petroleum coke and liquid bitumen. This part of aluminum in the supply chain, but also because of Chinese winter environmental protection production in a scene of chaos. But the link has been steadily tightened for several years, and analysts warned in 2015 that there might be a tight supply.

China is one of the world's leading producers of carbon anodes, but even before this year's seasonal production cuts, China has been increasing its output to meet domestic demand and reduce exports. The rest of the world, except China, has been increasingly looking for alternative supply.

"There's not enough coke," Ritchie said. Because petroleum coke accounts for only a small portion of the refinery's revenues, and most of this coke is not the right material to produce carbon anodes, it is unlikely that the supply side will respond quickly. Market rebalancing will have to be driven by demand side.

Raw material contraction

The market is looking at Chinese aluminum production, and the factors that are equally unstable in the refining process are often ignored. China's winter output reduction has exposed the basic pricing and supply problems of alumina and carbon anode industries. Both of these are the core materials that can not hedge costs, which have considerable implications for aluminum pricing, and make a puzzle that has multidimensional problems become more complex. And the impact on the pricing of aluminum ingots may never be so simple as it used to pass. Everyone is concerned about the situation of Chinese and local producers in the next few months, and speculation about the restart of refinery capacity in other parts of the world is heating up. However, from the atmosphere of last week's conference, it is likely that it is difficult for the industry to restart to get enough carbon anodes to activate its production line.

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