Since this year, the price of alumina futures has been rising. AO2407, the main contract for alumina, soared from 3,000 yuan/ton at the beginning of the year to more than 4,000 yuan/ton, an increase of more than 30% in five months, and the Australian alumina FOB also continued to rise sharply.

This is mainly affected by tight supply. Domestic bauxite supply has continued to be interrupted this year. The cumulative production has dropped 20% year on year so far this year. Alumina production has been affected by bauxite shortages, and alumina supply is also facing challenges from a global perspective.

In Monday's report, Morgan Stanley stated:

The global supply of 5.9 million tons of alumina has been blocked, which is equivalent to about 10% of the global supply after China is deducted. Due to China's need for more imports, the global alumina market is further constrained. The supply of alumina in China and the world is tighter, and alumina prices have been high for a longer period of time.

Damo predicts that alumina is currently in a tight balance. The average annual price of alumina will exceed 360 US dollars/ton in 2024. Any supply shock will cause prices to fluctuate sharply, and there is a risk that prices will rise further in the future.

Domestic bauxite supply continues to be interrupted, and global alumina supply is also facing challenges

According to Dama's analysis, domestic bauxite supply has continued to be interrupted since this year, and import dependency has increased:

Domestic bauxite supply has been blocked due to environmental protection and mine safety controls and declining ore grade. Up to now in 2024, bauxite supply has plummeted 20% year on year.

Considering that mining in Shanxi and Henan may resume production, domestic bauxite production is expected to drop 8% year-on-year to about 60 million tons throughout the year.

Alumina production has been affected by the shortage of bauxite. Damo stated:

Domestic alumina production increased by only 3% year-on-year in the first four months of 2024. Alumina production was affected by the shortage of domestic bauxite. The use of imported bauxite by inland alumina producers is uneconomical, far away, and logistics costs are high. Alumina production is expected to rise further as Yunnan restarts production capacity.

As domestic supply shortages continue, China is increasing imports of alumina and bauxite:

In the first four months of 2024, bauxite imports increased 6% year over year. Among them, imports from Australia increased 20% year over year and imports from Guinea increased 8% year over year. Currently, 70% of China's bauxite demand depends on imports. Of these, 74% are from Guinea and 22% are from Australia.

China is also importing more alumina, with imports increasing by 75% year to date. Of these, 76% are from Australia and 10% are from Indonesia. However, due to challenges in global alumina supply, domestic alumina imports declined sequentially in April.

At the same time, global alumina supply is also facing challenges:

Global alumina supply has been interrupted due to problems such as war, bauxite, or difficulties in natural gas sources. Up to now, about 5.9 million tons of global alumina supply have been interrupted, accounting for about 10% of global supply (excluding China). Considering that China needs to import more alumina, this will further limit the global alumina market and cause aluminum oxide supply in China and the world to become more tight, and prices will remain high for a long time.

Alumina supply is in tight balance

Overall, the Damo commodities team pointed out that the alumina market will be in tight balance in 2024, and the market is easily affected by any supply shocks.

Supply side: Last week, Rio Tinto announced force majeure factors for alumina shipments to two smelters, Yarwun smelter in Australia and Alumina in Queensland, saying there was a shortage of natural gas inventory/supply for power generation. Rio Tinto's action highlights the fragility of the balance between supply and demand, and shatters expectations that the alumina market may experience a small surplus.

Demand side: With the restart of the Yunnan smelter, China's aluminum production is expected to increase by 600,000 tons this year. At the same time, as profit margins increase, Europe is also showing initial signs of restarting, so demand for alumina will rise.

In terms of inventory, looking further, the inventory buffer for alumina in the market is limited. If there is competition over materials, the price of alumina may fluctuate sharply.

We believe this may keep alumina prices at historically high levels and increase the possibility that prices will soar. Prices are expected to exceed our FY24 average estimate of 360 US dollars/ton, and there are upward risks in forward-looking forecasts.

Looking ahead to the future of global bauxite prices, the key is whether China's bauxite imports will continue to rise? This depends on two factors: 1) domestic bauxite supply and 2) domestic bauxite demand. Dama stated:

For 1), short-term factors affecting bauxite production, such as mine safety and environmental inspections, seem to be becoming more frequent. Furthermore, iron ore grades will continue to decline, which means that China's demand for imported bauxite may increase as a share of total bauxite demand.

Regarding 2), it is expected that China's alumina production capacity and production will continue to rise until 2030, increasing by an additional 8-9 million tons every year. The development in this area depends to a certain extent on the upper limit of China's aluminum smelting production capacity. China is currently a net importer of alumina, about 1.8 million tons per year. Aluminum production is expected to increase by another 6 million tons this year, which means there is room for further growth in alumina demand.

Editor/Somer