Prices

An energy crisis emerged in late 2021 with curtailment of significant production in China and a global supply squeeze. Drought conditions saw hydropower capacity in Sichuan and Yunnan fall, with smelters having to curtail production. This saw prices start the year relatively elevated at ~US$2,900/t. Russia’s invasion of Ukraine and the uncertainty over supply chains saw European prices jump, reaching an intra-day high of over US$4,000/t in March.

Physical metal from Russia remains unsanctioned and capacity returned to production in China. Coupled with subdued demand caused by China’s covid-zero policy and energy struggles in Europe, prices largely eased from these early-year highs and, despite supply curtailments in Europe, have eased to ~US$2,500 for the majority of the second half of the year.

An arbitrage between Europe and Asian prices was caused by the loss of local supply in Europe and difficulty securing physical metal after warehouse stocks had largely moved to the Asian region. This saw premiums in both Europe and the US surge in the first half of the year. A softening of demand has seen them since ease.

Alumina markets have followed a similar trend to aluminium. FOB Australia prices surged in the wake of Russia’s invasion amid supply concerns—including removal of 1.7Mtpa in Ukraine itself—before easing over the rest of the year.

Imports/Exports

Physical Russian metal has, to date, not been sanctioned, although some consumers have been self-sanctioning. Major consumers Novelis and Boeing have confirmed they were not entering contracts for Russian metal in 2023. Constellium confirmed it will continue accepting Russian metal as physical material has not been sanctioned—also noting it only makes a small proportion of their purchases.

Chinese supply has largely offset European supply curtailments with China’s producers taking advantage of price arbitrage. Typically, a net importer of primary aluminium, domestic producers are willing to take advantage should higher prices elsewhere cover export taxes on unwrought material.

Russia’s invasion of Ukraine led the Australian government to place a ban on alumina and bauxite exports to Russia. Rusal’s 20% ownership of the QAL refinery in Queensland has also been due to Rusal’s major shareholders being placed under sanctions. This has seen a rise in alumina exports from China. It is assumed China is purchasing more alumina and on-selling to Russian smelters.

The Green Theme

The emerging Green Economy remains a major theme and will provide significant opportunity for aluminium demand growth. Potential applications focus on light-weighting for improving the battery range of EV’s, its use in some battery technologies as well as its application in the associated infrastructure which will need to be developed. Along with the benefits of its infinite recyclability, the outlook for aluminium within the Green Economy is bright.

This ‘Green’ focus, in turn, has led to increased attention on reducing the emissions associated with aluminium production. While recycling reduces energy requirements, ~95% from primary production levels, the forecast increase in demand will still need primary metal production to meet the increase. Attention will largely turn to smelters with hydroelectric power sources which allow the production of ‘green’ and low-carbon aluminium products.

Most of the new capacity coming online—particularly outside China—is targeted at the nascent low-carbon market. Alumar’s restart which has progressed over the year was dependent on securing suitable hydropower supply and Middle East producers are looking to link production volumes to PPA with solar farms.

Relying on recycled post-consumer scrap, Norsk Hydro is able to produce products with low carbon footprint, such as its Hydro CIRCAL extrusion ingot, which is made up of 75% recycled aluminium and has a footprint of 2.3kgCO2/kgAl. Further, its recycling system can produce near-zero carbon aluminium via using 100% recycled post-consumer scrap, attaining an emission footprint of 0.5-1kgCO2/kgAl.

To attain carbon neutral aluminium, Hydro is looking at replacing natural gas with renewable energy as well as carbon capture solutions and its novel HALzero reduction technology. This trend of decarbonisation has also been present across other major aluminium producers in 2022 with Alcoa and Rio Tinto progressing their ELYSIS inert anode project.

A 10% increase in low-carbon aluminium is expected to be seen in 2023, as well as further increases in subsequent years.

Capacity Developments

China remains exposed to having to curtail in the face of power disruptions. Drought conditions have harmed hydropower sources—potential Green Aluminium—and incurred curtailments. While they often ease through the middle of the year, it appears to be a consistent risk, particularly in the high-power demand winter season.

Forced curtailments are likely to be seen in the future. Should China persevere in its energy efficiency and decarbonisation efforts, are we seeing an end—or at least slowing—of its seemingly infinite production growth? Will future capacity developments have to be seen elsewhere?

Europe has borne the brunt of surging global energy prices and has been the region most affected by curtailments, with around a third of its output being cut throughout the year. AIP’s Dunkerque smelter has curbed 20% of its 290ktpa capacity while Speira has curtailed 50% of its 140ktpa Neuss smelter.

The 283ktpa ARLO Slatina aluminium smelter in Romania was curtailed in early 2022 as the company was unable to affordably produce aluminium. Hydro’s 175ktpa Slovalco smelter was already 40% curtailed at the beginning of 2022 but was fully curtailed by the end of September.

Facilities least affected by the energy price surge were those powered by renewable energy sources. Yet, even these smelters saw some curtailment in their production as falling demand would result in a stockpile build-up if production was kept at capacity.

Hydro has partially reduced production from its Hydro Karmoy and Hydro Husnes smelters in Norway, which corresponded to a production cut of 110-130ktpa.

Alcoa and JV partner, South32, have commenced the restart of the 268ktpa Alumar smelter in Brazil, which had been idle since 2015. Alcoa also brought an additional 35ktpa at the Portland smelter in Australia—which had not seen service since 2009. Efforts have also been made to return Alcoa’s 280ktpa Intalco back online but have been stymied by an inability to secure an appropriate power deal.

Adaro Mineral announced plans to build a 500ktpa aluminium smelter in North Kalimantan, Indonesia, scheduled to start operation by early 2025. The project has a potential total capacity of up to 1.5Mtpa, in which a second 500ktpa expansion phase is scheduled for the end of 2026, and the final 500ktpa expansion phase to come online by 2029 end. The project investment is estimated at US$2bn, which also includes the construction of smelter, power plants and port facilities.

In the alumina space, supply growth primarily came from the return of production capacity in China which had been curtailed through the country’s energy crisis in late 2021. Nanshan’s 1Mtpa Bintan refinery and Hongqiao/Cita Mineral’s Well Harvest 1Mtpa expansion also ramped up in Indonesia.

Russia’s invasion of Ukraine has seen the 1.7Mtpa Mykolaiv refinery fully curtailed and likely damaged. Owned by Russia’s Rusal, the supply hit has affected the company’s own integrated supply chains and, along with Australia’s ban on exports, seen it look to China to fill supply gaps. The Russia-Ukraine war has also created concerns for the 2Mtpa Aughinish refinery in Ireland.

Wholly owned by Rusal, the plant has suffered from regional energy costs as well as uncertainty generated by potential sanctioning of Russian businesses. The plant is a major regional alumina supplier and curtailment, or disruption of its operations will further increase input costs for the region’s smelters.

To date, the refinery is understood to be continuing to operate at near capacity. The energy crisis in Europe, arising from the invasion, did extend beyond the smelting sector to affect alumina producers. Alro’s 600ktpa Tulcea refinery in Romania was fully curtailed with soaring energy costs cited as the reason.

A recovery plan for the Jamalco refinery in Jamaica following a 2021 boiler house explosion, which removed 1.5Mtpa of capacity from the market, was expected to see a restart of production in mid-2022 and a return to full capacity by mid-2023. News on the progress of this project has been sparse.

Bauxite

In the bauxite space, the focus has remains firmly on West Africa. Soaring exports out of Guinea, with volumetric increases largely headed to China, have continued unabated since the 2021 military coup.

In 2022, Guinea’s military government have made attempts to spur development of domestic downstream capacity and move up the value chain in its bauxite industry by demanding multinational firms operating there to facilitate the process, calling for concrete plans for refinery developments.

However, the companies are not exactly sprinting to realise any refinery developments citing a range of logistic and energy issues. Guinea’s issues may be solvable via hydropower expansions and governance reforms, but both will be difficult to pursue given the unstable political environment.

A total ban on bauxite exports from Indonesia is expected in the not-too-distant future to incentivise the domestic production of alumina, in a bid to improve its economy via exports of semi-finished and finished products. This will likely see a ban on raw exports, similar to nickel. Currently, Indonesia’s main consumers of its mined bauxite are its neighbouring Asian countries, including China.

China will continue looking to secure alternate supplies for its increasingly imported bauxite-focussed domestic refining capacity. Alternatively, Chinese companies will look to develop capacity overseas, as starting to be seen in Indonesia, and are likely to be a first mover in any new development in Guinea.

The export ban poses little concern to China as it has partially diversified its sources over the years—predominately securing Guinea supplies, reducing dependence on Australia.