Global energy transition and supply issues key for aluminium in 2020

Potential supply disruptions in the Gulf and West Africa are key to the outlook for aluminium in 2020, according to Wood Mackenzie.

In addition to potential supply issues, the global energy transition is expected to impact the industry as green aluminium may finally deliver the premium sought by producers.

What are the biggest trends to watch in the global aluminium market in 2020? Edgardo Gelsomino, Wood Mackenzie Head of Aluminium, sees six key themes:

• Aluminium production may be impacted by an escalation in Middle East tensions
• Expectations of Rest of the World (ROW) surplus may also be dashed by production cuts
• Smelters may produce more ingot at the expense of value-added products (VAPs)
• Green aluminium to deliver returns?
• China’s ability to absorb the ex-China alumina surplus is crucial
• Guinea politics could spill over into seaborne bauxite supply disruptions

Gelsomino said: “With 6.8 Mt, the Middle East region holds 10% of the world’s aluminium production and that figure rises to 22% if China is taken out of the equation.

“A blockade of the strait of Hormuz has the potential to disrupt the flow of region’s aluminium and, therefore, prevent producers from receiving critical raw materials. Materials shipped through the straight could also be hit by higher insurance or shipping costs.

“Except for Saudi Arabia and Oman, given their lower reliance on the strait of Hormuz, all other operations are vulnerable. We calculate that around 4 Mt of smelter production may be affected by a lack of raw materials, including those operations relying on both imported and domestically sourced alumina.

“The market will be closely watching to see if a disconnect between the price of alumina and aluminium emerges. Alumina prevented from reaching consumers in the Middle East would need to find a market elsewhere, with a negative effect on the alumina price. Lower smelter production would have the opposite effect and would result in a significant spike in the aluminium price.”

Wood Mackenzie forecasts more than 1 Mt of new aluminium smelter capacity to be added in 2020, with an estimated demand increase of only a third of that figure.

While greenfield capacity commissioning and restarts will likely stay on target, high-cost smelters may buckle under the strain of low LME aluminium prices. As a result, voluntary production cuts could soften Wood Mackenzie’s surplus outlook.

In search of higher profit margins over the past decade, smelters have shifted their product mix towards VAPs, such as billet, slab and primary foundry alloy.

As well as higher netbacks, the less commoditised nature of VAPs allowed smelters to benefit from relatively stable orders with longer-term contracts versus ingot.

However, excess supply and poor demand in 2019 pushed margins for VAPs to levels where many smelters might now start switching their product mix towards ingot in order to access the larger remelt consumer base, according to Wood Mackenzie.

“This includes ingot demand for financing, which often acts as a safe harbour for smelters which might otherwise reduce production more quickly. The siphoning of excess units by demand from financial participation may create an artificial shortage of metal, propping up ingot premia and reducing the need for smelter production curtailment.

“While there is no appetite for a repeat of 2011-2014, conditions in 2020 are ripe for a sizeable build in aluminium inventories,” said Gelsomino.

Climate change and issues surrounding environmental, social and corporate governance (ESG) moved from niche to top of the global agenda in 2019.

Wood Mackenzie expects this to continue in 2020, with the entire aluminium value chain facing significant challenges in lowering its carbon footprint. This is especially acute in primary smelting where, globally, fossil fuel sources accounted for 72% of total smelter electricity supply in 2019.

“Will 2020 see the emergence of a market that prices high and low carbon-intensive aluminium differently? Several producers already have their own green aluminium brands given their use of hydroelectric power.

“While Hydro, UC Rusal, Rio Tinto and Alcoa have been selling low carbon primary metal for several years, they have not received a green premium for the LME priced aluminium made from fossil fuels. Similarly, no major consumer has stated an intention to pay more for greener aluminium.

“Previously, low carbon aluminium has seen as a “nice to have” product but 2020 could see this change.

“The LME is investigating the possibility of creating a new market for green aluminium by using warehouse ownership documents to identify low carbon material. However, it has rejected creating a low carbon futures contract, which would generate a differentiated price.

“2020 may well be the year when there is a consolidation of the concept of a two-tier market for primary aluminium,” said Gelsomino

There is no disputing that ex-China alumina production is growing faster than its equivalent aluminium production.

“The stability of the overall global - excluding China - alumina market therefore depends on exports to China in a steady and regular pattern. An unpredictable pattern sets up the potential for depressed prices where producers may be unwilling, or unable, to significantly curtail output.

“Our view is the oversupply will keep the Australian spot price low enough to maintain an arbitrage for Chinese alumina buyers. However, the more China imports, the more domestically produced alumina it will have to displace. Lower alumina prices may therefore force Chinese refineries to cut output or delay expansion plans,” said Gelsomino.

The incumbent president in Guinea, Alpha Conde, is seeking to hold a referendum in towards in 2020.

“On 7th January 2020, the opposition party announced that it would boycott legislative elections scheduled in February in protest. Our base case is that the disruption to bauxite production and exports will be minimal.

“However, the expansion in Guinea’s bauxite production since 2015 means that export infrastructure is a strategic target should anti-government protests become more focused. Guinea bauxite supply now accounts for about two-thirds of the global seaborne market,” added Gelsomino.