Bauxite to Aluminium

Bauxite Demand

Increasing long term demand for aluminium and alumina will result in commensurate increases in demand for bauxite.

Greenfield bauxite projects in both developed and developing nations can face substantial lead times and lengthy delays from project inception to actual production.

The other major factor providing further impetus to a tight internationally traded market is that bauxite-exporting countries and vertically-integrated companies have an incentive to support value-added refining particularly in developing regions. This provides a significant market opportunity for independent bauxite exporters who are able to capitalise on long term growing bauxite demand and fill a growing void provided they are cost competitive and relatively close to market.

Bauxite supply risk

Traditionally, Indonesia has been the primary source of bauxite for China. According to China’s National Bureau of Statistics (NBS) however, Indonesia’s market share of Chinese bauxite imports fell to just over 65% in 2007 from approximately 90% the previous year. A recent effort to address illegal mining in Bintan saw imports from Indonesia to China decline, with Indian, and (to a lesser extent) Australian, sourced bauxite filling the supply gap.

Depletion of Indonesian bauxite reserves (resulting in a shift to West Kalimantan mines) and a drop in its alumina grades will also have a marked impact on Indonesian exports. The construction of a refinery, expected to be in the West Kalimantan area which will utilise local bauxite resources, is likely to further limit the prospects for bauxite exports from Indonesia in the future.

Security of bauxite feedstock supply will therefore remain important to Chinese refineries as they continue to add capacity in the long term. For this reason, regional suppliers in Australia and India will be well positioned. Vietnam, despite limited resource developments to date and current policy on exports, may also be a potential future regional supplier. Prospective alumina refining capacity additions in these respective countries will act to negate surplus bauxite exports that may otherwise have been directed to China. Consequently, non-vertically integrated companies (independent producers) with mineral reserves of sufficient quality, infrastructure and relatively low operation costs will have a distinct opportunity to take advantage of continuing tight market conditions. Cape Alumina is well positioned to play an important role in thes emerging market.

Bauxite Pricing

Historical trends

Bauxite is not a commodity traded on a recognised exchange (such as the London Metals Exchange) and, as a consequence, bauxite prices are not transparent or readily available.

In general, although bauxite prices are not readily observable, most third party metallurgical bauxite sales are on fixed volume/and or medium to long-term contracts. These take several forms – linkage to the aluminium price, the alumina price or the cost of mining – and sometimes a combination of these.

Prices relate to the value of contained alumina and its type (for example gibbsite, being easier to process), with deductions for reactive silica content. Producers also have to consider selling at a discount if they are a long way from a particular market in order to compete with closer suppliers. This factor used to cap free on board (FOB) prices for Australian bauxite exported to the United States when refineries located there were the overwhelming driver of demand for internationally traded bauxite.

Figure 6 shows the long-term historical price trend for internationally traded bauxite to the United States based on weighted average prices for material exported from Australia, Brazil, Guinea, Guyana and Jamaica.

This is a useful illustration as it serves to demonstrate (along with most commodities) the long term historical price decline of bauxite in real terms and the recent reversal of this trend. It is also significant in that up until the end of 2005, the United States was the dominant driver of demand for internationally traded bauxite. Prices for bauxite destined for the United States in recent times (from the aforementioned countries) have ranged on a weighted average basis between US$20-30/t FOB.

Current Bauxite Price Trends to United States (FOB 2007 Real Terms)

Source: USGS, AME Estimates

Recent trends

Since China overtook the United States as the world’s largest importer of bauxite in the latter part of 2006, and is expected to increasingly dominate international bauxite trade, current pricing trends are best reflected in analysis of prices for the Chinese market, particularly from key regional suppliers.

As Indonesian-sourced bauxite imports into China continue to decline, suppliers from both Australia and India will increasingly be able to capitalise on sales into China in order to fill the gap in supply.

Bauxite operations with mineral reserves of sufficient quality, infrastructure and relatively low operating costs that are not part of vertically integrated or aligned with specific operations will have a distinct opportunity to take advantage of the long term growing demand for alumina refining.

Australian bauxite export prices, are estimated to have averaged around US$17/t in 2005 based on analysis of data derived from ABARE and Rio Tinto. By 2007 average prices had increased to more than US$23/t and by mid 2008 stood at an average of between US$35-45/tonne. Strong demand together with rising costs of production due to increased fuel costs, longer haul distances and higher labour costs have provided the impetus for price increases.

It is now clear that the dramatic economic slow down that took hold in October, 2008, will have a negative impact on Chinese bauxite demand; however the extent of this slow down is, as yet unclear.