Bauxite & alumina trades

Emerging and developing nations rich in mineral resources nurse the ambition of adding sufficient value to natural resources before these leave their shores, writes Kunal Bose. Driven by this logical desire but which comes as a shocker to big natural resources importing nations like China, Japan and South Korea, Indonesia has had, in place since 2009, law abiding groups that process minerals up to a point – like bauxite being refined into intermediate chemical alumina, feedstock for aluminium smelters.

But it was only last year that Djakarta started pursuing the goal of value addition with seriousness by way of a 20% export tax on bauxite and also export restrictions on the mineral. China, which is always found to be managing its exim trade with great dexterity, imported unusually large 5.3mt (million tonnes) of bauxite from Indonesia during March and April of 2012 in a move to stockpile ahead of any export curbs. Denied the supply of good quality bauxite from its own mines, Chinese imports of the mineral were over 40mt in 2012 in which the share of Indonesia was as much as 28.4mt.The second biggest supplier to China was Australia with 9.5mt followed by India with over 1.3mt.

Whatever the quality of its bauxite and cost of its mining and refining, China remains relentless in stepping up production of the mineral by opening new mines and also expanding the ones in operation.This becomes evident from China’s consumption of bauxite rising 28% to nearly 115mt in 2012 when imports fell by 5.4mt.According to the Chinese ministry of land and resources, the country’s proven bauxite reserves grew 210mt to 4.08bn tonnes in 2012, rising for three consecutive years at a CAGR of 4.75%.

“There is a lesson for India and for many other mineral resource rich countries in the way China goes about prospecting and exploration employing state-of-the art devices, including satellite reconnaissance. The low quality of its bauxite and also the high cost of its extraction are not proving deterrents for China’s progress in bauxite mining. Bauxite in China is found almost entirely in Shanxi, Henan, Guizhou, Guangxi, Sichuan, Shandong and Yunan provinces,” says RK Sharma, director general of Federation of Indian Mineral Industries. Resource nationalism manifested in growing degrees from Indonesia to Vietnam to India will explain China’s relentless pursuit of self- reliance in bauxite and iron ore. An Alcoa official recently said in an interview with London-based Metal Bulletin that “what happened last year in Indonesia was really a wake-up call in China. It’s not maybe so much that the industry expected a ban would be effected, but I think probably the industry was surprised that Indonesia actually did stop bauxite shipments for a few months.”

SMM further says Indonesian bauxite recommends itself to Chinese refineries for abundance of availability, good quality and low prices compared to other supply sources. In any case, large imports are justified on grounds that trihydrate bauxite found abroad is superior to Chinese monohydrate bauxite. What form Indonesian resource nationalism will finally take is still in grey area. The country’s energy and mineral resources ministry has given indications that it will be ready to consider any suggestions relating to degrees of value addition to minerals, including bauxite. But mining companies not taking initiative in minerals processing beyond extraction might be barred from participating in export starting 2014, according to the ministry, which is promising reliable power supply and land for minerals downstream units.

Encouragingly for Indonesia, the world’s leading aluminium producer United Co. Rusal of Russia has plans to build a refinery most likely in West Kalimantan where good quality bauxite is found in very large quantities. In its recent meeting with Indonesian trade minister, Rusal has indicated an investment of $2bn to build a 1.8mt alumina refinery. Expect Rusal to secure tax concessions from the Indonesian government before it finally commits investment in the refinery. What also it will have to do is to sign binding agreements with local mining companies for feeding the proposed refinery with bauxite. Rusal has indicated that it will accord priority to local supply of alumina so that Indonesian imports, a strange phenomenon for a country with such plentiful bauxite deposits, are progressively curbed. The country’s only smelter Inalum is now totally import dependent.

Incidentally, once before Rusal made attempts to build a refinery in West Kalimantan teaming up with government owned Aneka Tambang without success. “If Rusal sets its foot in Indonesia then expect other leading aluminium producers making attempts to build refineries there,” says metals analyst Rohit Murthy. Aluminium leaders are all the time seeking greater integration cutting across country borders between downstream (smelting) and upstream activities like mining and refining. Like the Norwegian Norsk Hydro with presence throughout the aluminium value chain from bauxite mining to extruded and rolled products owns 91% of Alunorte refinery in Brazil with capacity of 6.3mt. Similarly,Alcoa owns a 4.2mt refinery in Australia. In a way, the world aluminium industry is ahead of steelmakers in integrated global operation.

Like Indonesia, India too is walking the path of discouraging bauxite exports without value addition. Prompted by the Federation of Indian Chambers of Commerce and Industry (FICCI), the Indian budget for 2013-14 introduced a 10% ad valorem export duty on the mineral.

Metals consulting firm CRU estimates the Indian export levy is adding about $4 a tonne to bauxite cost. An industry official said the “government saw merit in FICCI demand in the context of difficulties in opening new bauxite mines and closure of a 1mt refinery of Vedanta Aluminium in Orissa since December.” The last time India saw the opening of a large bauxite mine was nearly three decades ago at Orissa’s Panchpatmali hills, says Vedanta Aluminium managing director Sushil Kr. Roongta. “Aren’t we in a paradoxical situation that even while India has the world’s fifth largest bauxite resource of 3bn tonnes, the country is constrained to realize its aluminium-making potential because of difficulties in opening new bauxite mines, thanks to regulatory issues and roadblocks created by NGOs,” laments Roongta.

Murthy says,“like in iron ore China will continue to pursue acquisition of bauxite resources abroad from Mekong delta nations through Africa to South America. Acquisitions could be in the form of outright purchases of bauxite assets or by way of equity buying in mining companies. In the case of iron ore, China’s medium-term target is to have at least half the imports coming from its owned overseas assets. A similar target for bauxite has not been spelt out. However, the world got an idea of how the Chinese mind is working when in 2008 the government-owned Chinalco wanted to invest $19.5bn in Anglo- Australian Rio Tinto with a large aluminium portfolio that includes Alcan. It is another matter that Chinalco attempts met with a shock end.”

Other Chinese enterprises, including public undertakings Minmetals and Chalco are all the time scouting for overseas bauxite resources. Chalco has revived its bid for rich bauxite deposits in Australia’s Cape York Peninsula. Including Rio Tinto there are six other contenders for the asset for which interest has revived following Queensland government led by Liberal National Party dropped the condition of building an integrated alumina refinery in the downstream. Trading company Hongfan Industries with ownership of 42% in the 125,000-tonne Sichuan Qimingxing smelter is pursuing offtake possibility of up to 5mt of bauxite from Alufer’s Bel Air project in Guinea. In the meantime, Alufer has brought its Bel Air project JORC compliant by linking it to a bauxite resource of 146mt with alumina content of 44.4% and 1.67% silica. Hongfan has struck long-term purchase agreements with some other bauxite groups.

Most standalone refineries and smelter cum refineries believe that the best way to find raw material (bauxite) security is by way of having captive mines. This has once again come to light as Dubai Aluminium (Dubal) and Abu Dhabi’s Mubadala Development Company are acquiring the remaining portions of Guinea Aluminium Corporation (GAC) they don’t already own. The move is seen as part of a grand strategy by UAE smelters Dubal and Emirates Aluminium Company (Emal) to secure long- term access to high quality bauxite in abundance. The Guinean government has approved the transfer of 33.3% holding each of BHP Billiton and Global Aluminium Corporation of the US in GAC to the two UAE enterprises in the hope that the proposed bauxite mining and alumina refinery project would as a result gain in pace. Dubal already owns 25% of GAC and Mubadala 8.33%. A spokesperson for Mubadala said,“upstream development is part of the UAE’s aluminium strategy as we continue to build a global champion” in the industry.

Prolonged difficult times for commodities in general and its shift in focus from aluminium would explain BHP exit from GAC, which has mining concession covering 690km2 in Guinea’s prolific Boka bauxite region. For the GAC project, 19 bauxite bearing plateaus within the mining concession have been identified. Based on bauxite to be mined at Boka, GAC will have a refinery of 3.6mt capacity. Guinea wants an increasingly bigger percentage of bauxite mined to be processed into alumina in the country before exports. About 10% of mined Guinean bauxite is value added to alumina. The country is targeting 40% mined bauxite to be locally processed and GAC bringing into stream the alumina refinery following ownership restructuring will be a major step in that direction. In pursuit of the target, the Guinean government has signed an agreement with UC Rusal, the global leader in alumina and aluminium, which will translate into the Russian company developing Dian-Dian, the world’s largest bauxite deposit, in phases. In the first phase, Rusal will open a bauxite mine with a 3mt capacity by 2015 end. During this period, Rusal will complete a feasibility study concerning lifting of mine capacity to 6mt as also for building a 1.2mt alumina refinery. In further steps, Rusal owning as many as 40 assets in 13 countries and five continents, will take Dian-Dian mining capacity to 12mt and alumina refining capacity to 2.4mt.

At the time of writing this article,Australian alumina spot prices were trading at $325–331 a tonne, FOB (free on board) Australia, marking a fall of $3 over May end. Significantly, in the wake of Norsk Hydro declaring a force majeure on June 12 following production disruptions caused by power outages at its 6.3mt Brazilian refinery Alunorte the differential between Atlantic and Australian alumina prices has substantially narrowed to about 50 cents a tonne against $6.50 a tonne at June beginning. The alumina price outlook is to be seen in the context of some high cost smelters both in and outside China being forced out of production because of the white metal staying stubbornly well below $2,000 a tonne. At current aluminium prices, around 25% smelter capacity is rendered unprofitable. No wonder from Chalco to Alcoa to Rusal, aluminium majors have announced varying degrees of capacity resting.

Engineering, procurement, construction, and project management specialist Bechtel is currently modernizing Rio Tinto Alcan’s (RTA) 57-year-old Kitimat aluminium smelter in British Columbia, Canada. The modernization will create an environmentally superior, safer, and more productive smelter, elevating RTA’s British Columbia operations entity to a world-class aluminium producer. Bechtel is responsible for engineering, procurement, and construction management of the project.

The modernization will employ the latest evolution in RTA’s state-of-the-art Aluminum Pechiney (AP) Prebake technology. Production levels will be boosted to about 400,000 tonnes per year, and will reduce total environmental emissions by more than 40%, including some 500,000 tonnes of greenhouse gas emissions annually. The facility will have a design life of 35 to 50 years.

No new aluminium smelter has been built in Brazil for 30 years, writes Patrick Knight. But with demand for the metal growing ever faster fast, imports are set to cost more than exports earn soon.

Because Brazil has not built any aluminium smelters for so long, to meet demand growing by about 7% a year, imports of the metal have soared.

Imports of primary aluminium, of scrap, and a growing share of finished products, mean the gap between what industry exports earn and imports cost, could fall to zero this year.

If it were not for the $2.5 billion the export of bauxite and alumina now earns each year, the industry would already be in deficit.

Although some of the numerous taxes the industry has to pay for electricity have been reduced, cutting the price by 10–15%, the aluminium industry says that if a new smelter is to be built in Brazil, the cost of electricity needs to fall by about 30%.

With no new smelter planned for Brazil, the Rio Tinto company is adding insult to injury by proposing to build a 700.000 tonnes capacity smelter, to cost $3.5 billions, in Brazil’s tiny neighbour Paraguay.

Paraguay now sells most of its 50% share of the electricity generated at the huge Itaipu power station, on the Parana river, to Brazil. Only about 10% of the 12,000 Mws generated is used in Paraguay itself.

If the smelter went ahead, most of the Itaipu electricity Paraguay now sells to Brazil, and which is the country’s main source of revenue, would be needed at the smelter.

While Brazil is the world’s second-largest producer of bauxite, of which more than 40mt (million tonnes) is now mined each year, as well as the third largest producer of alumina, of which about 11mt is now produced, Paraguay produces none of either product. Both would have to be imported, probably from Brazil.

About 1.4mt of primary aluminium is now produced in Brazil each year, 200.000 tonnes less than six years ago. Several high cost smelters or elderly production lines have been shut down in the past few years.

New norms for the fuel efficiency of cars and trucks are gradually coming into force, while thousands of kilometres of long-distance transmission lines are being built to link new power stations in Amazonia with the places the electricity is needed.

The civil construction industry is going strong, while 80% of all the 25 billion cans sold in Brazil each year, are now made from aluminium.

As a result of all this activity, demand for the metal is now growing by about 7% a year. If this rate of growth continues, about 3.5mt of primary aluminium will be needed in Brazil by about 2025, more than twice as much as is used today.

This year Brazil will import about 300,000 tonnes of processed items, notably window frames and transmission cables. Only 70,000 tonnes of processed items were imported as recently as 2009.

for the reluctance to invest is the fact that the world price of primary aluminium has been below the key $2,000 a tonne mark for the past three years, which is close to the cost of production.

As a result investments have been few and far between.

The low price is mainly because China has increased its output of the metal six fold in the past 15 years.

But with virtually all the smelters in China now losing money, the news that the largest company there, Chalco, which like most smelters in China, is state owned, is to halt output a 300.000 tonnes capacity mill has changed the outlook for the better.The world aluminium price hardened on the news.

Primary aluminium and finished products are not the whole story for the aluminium complex in Brazil, which continues to be one of the world’s leading suppliers of bauxite and alumina.

Despite the fact that companies such as Alcoa and Novelis are postponing making investments in new smelters, Brazil is a relatively calm part of the world.

For this reason, the largest companies are unlikely to pull out, even though they threaten to. They can be relied on to keep the largest and lowest cost smelters there going, even if they are more costly to run than those in the Middle East or Africa, where companies take advantage of the low cost of energy, but where security continues to be a problem.

However much the companies complain, usually because they want to persuade the Brazilian government to aid them, new bauxite mines are being opened and output at existing ones increased. More alumina is being made and exported each year as well.

Alcoa will mine about 4mt of bauxite this year from its ‘Juruti’ mine, adjacent to the main Amazon river, navigable for very large vessels at this point. Alcoa claims to be losing money at a mine which first opened in 2009, and where ideally, output needs to rise to about 12mt to achieve economies of scale.

Alcoa says it cannot afford to make the investments needed for this, claiming that demand for bauxite and the alumina made from it, is growing too slowly to justify the expense.

However, at the same time as Alcoa is holding back, the Votorantim company, which like all the others in the industry, has been adding processing capacity, rather than building new smelting capacity, plans to open a brand new bauxite and alumina project in the Amazon region, where most of Brazil’s massive bauxite reserves are concentrated.

At the moment, the average car sold in Brazil, the majority powered by engines of only one litre capacity, contains about 50kg of aluminium. With more than three million cars, buses and trucks now being sold in Brazil each year, the motor industry now uses about 150,000 tonnes a year.

The larger cars made in the United States and Europe use about 150kg of aluminium each.

New regulations aimed at increasing the efficiency of engines, both regarding the emission of carbon and also the amount of fuel they use, will oblige assemblers to use more aluminium from now on, to keep down weight.

The lighter the car, the less fuel it uses, so it already makes sense to pay a little more for a new car, and save on the cost of fuel over a year or two.

New regulations restricting the number of hours truck drivers may remain at the wheel and the frequency of rest breaks, aimed partly at cutting the horrific toll on the roads in Brazil, where 80,000 now die each year, will mean that up to 20% more trucks will be needed to carry the same amount of goods as before.

New restrictions regarding the maximum weight each goods vehicle can carry, plus its own weight to 75 tonnes, will have a similar effect.

To compensate for the new weight restriction, using more costly aluminium for bodywork, in preference to steel, means each truck is able to carry up to five tonnes more goods than if it had a steel bodywork.

Some industries, notably sugar, which moves about 650mt of cane from the fields to mills each year, has already begun to switch from steel to aluminium in their trucks, to allow them to carry more. Pulp mills which between them carry up to 40mt of wood from forests to mills, are doing the same.

Work has begun in Sao Paulo on building one of the world’s first mass transit monorails. Because monorails run on rubber tyres, rather than on a steel track, the weight of carriages is critical. So aluminium, rather than steel, will be used for bodywork.

Twenty-five billion aluminium cans will be sold in Brazil this year, twice as many as a decade ago. Because restrictions regarding drinking and driving have been tightened, the sale of beer in bars and restaurants, where bottles are more popular than cans, has been falling steadily. Sales of canned beer in supermarkets, to be drunk at home, on the other hand, have been gaining ground.

Brazil world leader in the proportion of cans which are recycled and 98% of all cans are now recovered by an army of collectors.