Alumina market roller coaster spins price to two-year lows

By Andy Home
LONDON, July 30 (Reuters) – The alumina market has collapsed over the last three months with both Chinese and Western prices now at their lowest levels in two years.
The action in China has been particularly brutal. Spot prices surged to a six-month high of 3,170 yuan per tonne in May as production in the province of Shanxi was disrupted by environmental closures.
So violent has been the subsequent sell-off to below 2,500 yuan that producers are now voluntarily cutting output to try to support prices.
Since alumina is the key metallic input to the aluminium smelting process, bombed-out alumina prices are bad news for an aluminium market that is itself treading heavy water right now.
The London Metal Exchange (LME) three-month aluminium price is currently trading just above the $1,800 per tonne level after touching an 18 month low of $1,745 in June.
Lower alumina prices serve to lower the aluminium production cost-curve, the break-even point for smelters that helps define the market’s downside.
Global smelter profitability is once again beholden to the gyrations of the alumina price with still little evidence that such volatility is being hedged in either the CME Group’s or LME’s new futures contracts.
THE RETURN OF ALUNORTE
The CME alumina price, tellingly, never reacted to the May spike in the Chinese price but rather kept grinding lower to today’s $305 per tonne, a level last visited in June 2017.
The core driver has been the return of the giant 6.3-million tonne per year capacity Alunorte plant in Brazil.
Alunorte had been operating at half capacity since February 2018 under a court order related to allegations of run-offs from a tailings dam holding the “red mud” generated in the refining process.
Operator Hydro was given clearance to resume full output in May this year and Alunorte was already running at 80-85% capacity in June, the company said in its Q2 results. That should rise to 85-95% in the fourth quarter.
Alunorte’s return closes a supply gap in the Western market which had to be filled by Chinese exports, an unusual occurrence in the alumina market.
Chinese exports mushroomed to 1.5 million tonnes last year from just 56,000 tonnes in 2017.
The tide has since turned. Exports have dropped off sharply and the country has returned to being a net importer since January.
The extra supply is no longer needed thanks to the return of Alunorte, the continuing ramp-up of new capacity by Emirates Global Aluminium and stagnant aluminium production.
Metal output outside of China was down by 0.6% in the first half of 2019, according to the International Aluminium Institute.
CHINESE BOOM AND BUST
Chinese alumina prices have boomed and bust in the space of just three months.
Environmental closures in May, triggered by a “red mud” leak at Xinfa Group’s Jiaokou alumina refinery in Shanxi, spooked the local supply chain.
Any impact from those closures, however, has been fleeting. National output dipped appreciably in May but has since bounced back to 6.41 million tonnes in June, the highest monthly run-rate since May 2017.
Cumulative alumina output rose by 3% in the first half of the year and with China’s own aluminium production also flat-lining this year, analysts at Morgan Stanley calculate a 200,000-300,000 tonne surplus in the country. (“Stopping alumina’s slide”, July 29, 2019).
Previous fears of a supply shortfall have been rapidly dialled back and spot prices are now at a level where higher-cost producers in northern regions are suffering “serious losses”, according to Antaike, the research arm of the China Nonferrous Metals Industry Association.
Producers have announced a collective temporary curtailment of 1.5 million tonnes, Antaike says.
As ever with such coordinated announcements by Chinese producers, there’s an element of window-dressing previously scheduled maintenance work, but the real significance is what it says about the margin pain occasioned by falling prices.
Higher-cost producers have in the past been able collectively to support prices around $300 per tonne but with alumina’s own input costs falling, it remains to be seen how disciplined supply will be this time around.
There is growing speculation among analysts that China’s alumina sector is heading for the same sort of structural reform treatment already imposed on the smelter segment of the production chain.
That might be a source of long-term support to the alumina price but for now it’s down to whether Chinese producers can curtail output sufficiently to balance the domestic market.
RIDING THE ROLLER COASTER
Alumina has been on a high-tempo, high-volatilty price trajectory over the last couple of years.
It was above $600 per tonne as recently as September 2018 before crashing to its current producer pain levels.
The price of alumina was once linked to that of aluminium. Producers embraced spot trading several years ago, arguing that alumina supply-demand fundamentals were different from those of the metallic product.
They have turned out to be right, although not perhaps in the way they imagined. Alumina has turned out to be a much more volatile package of drivers than aluminium.
What’s curious is that all this volatility hasn’t inspired much interest in using the paper market to hedge price risk.
The LME’s newly-launched alumina contract didn’t trade at all through June. CME’s contract, which started trading in 2016, has seen only sporadic volumes since inception. Activity this year has almost totally dried up with just 240 contracts traded in January-June.
The Shanghai Futures Exchange (ShFE) is undeterred and has promised its own contract later this year.
It’s possible that last year’s high prices actively deterred producer hedging interest but with the outlook increasingly bearish, that might change.
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Morgan Stanley sees “near term price support around $300 per tonne, with risk to the downside”.
However, given the excitement of the last two years, you wouldn’t bet against a few more spins of what Antaike calls the alumina “roller coaster”.
($1 = 6.8876 yuan)
NEW YORK – This month marks the 75th anniversary of the signing of the Bretton Woods agreement, which established the International Monetary Fund and the World Bank. For the IMF, it also marks the start of the process of selecting a new managing director to succeed Christine Lagarde, who has resigned following her nomination to be European Central Bank president. There is no better moment to reconsider the IMF’s global role.
The most positive role that the IMF has played throughout its history has been to provide crucial financial support to countries during balance-of-payments crises. But the conditionality attached to that support has often been controversial. In particular, the policies that the IMF demanded of Latin American countries in the 1980s and in Eastern Europe and East Asia in the 1990s saddled the Fund’s programs with a stigma that triggers adverse reactions to this day.
It can be argued that the recessionary effects of IMF programs are less harmful than adjustments under the pre-Bretton Woods gold standard. Nonetheless, the IMF’s next managing director should oversee the continued review and streamlining of conditionality, as occurred in 2002 and 2009.
The IMF has made another valuable contribution by helping to strengthen global macroeconomic cooperation. This has proved particularly important during periods of turmoil, including in the 1970s, following the abandonment of the Bretton Woods fixed-exchange-rate system, and in 2007-2009, during the global financial crisis. (The IMF also led the gold-demonetization process in the 1970s and 1980s.)
But, increasingly, the IMF has been relegated to a secondary role in macroeconomic cooperation, which has tended to be led by ad hoc groupings of major economies – the G10, the G7, and, more recently, the G20 – even as the Fund has provided indispensable support, including analyses of global macro conditions. The IMF, not just the “Gs,” should serve as a leading forum for international coordination of macroeconomic policies.
At the same time, the IMF should promote the creation of new mechanisms for monetary cooperation, including regional and inter-regional reserve funds. In fact, the IMF of the future should be the hub of a network of such funds. Such a network would underpin the “global financial safety net” that has increasingly featured in discussions of international monetary issues.
The IMF should also be credited for its prudent handling of international capital flows. The Bretton Woods agreement committed countries gradually to reduce controls on trade and other current-account payments, but not on capital flows. An attempt to force countries to liberalize their capital accounts was defeated in 1997. And, since the global financial crisis, the IMF has recommended the use of some capital-account regulations as a “macroprudential” tool to manage external-financing booms and busts.
Yet some IMF initiatives, though important, have not had the impact they should have had. Consider Special Drawing Rights, the only truly global currency, which was created in 1969. Although SDR allocations have played an important role in creating liquidity and supplementing member countries’ official reserves during major crises, including in 2009, the instrument has remained underused.
The IMF should rely on SDRs more actively, especially in terms of its own lending programs, treating unused SDRs as “deposits” that can be used to finance loans to countries. This would be particularly important when there is a significant increase in demand for its resources during crises, because it would effectively enable the IMF to “print money,” much like central banks do during crises, but at the international level.
This should be matched by the creation of new lending instruments – a process that ought to build on the reforms that were adopted in the wake of the global financial crisis. As IMF staff have proposed – and as the G20 Eminent Persons Group on Global Financial Governance recommended last year – the Fund should establish a currency-swap arrangement for short-term lending during crises. Central banks from developed countries often enter into bilateral swap arrangements, but these arrangements generally marginalize emerging and developing economies.
Then there are the IMF initiatives that have failed altogether. Notably, in 2001-2003, attempts to agree on a sovereign debt-workout mechanism collapsed, due to opposition from the United States and some major emerging economies.
To be sure, the IMF has made important contributions with regard to sovereign debt crises, offering regular analysis of the capacity of countries in crisis to repay, and advising them to restructure debt that is unsustainable. But a debt-workout mechanism is still needed, and should be put back on the agenda.
Finally, the IMF needs ambitious governance reforms. Most important, building on reforms that were approved in 2010, but went into effect only in 2016, the Fund should ensure that quotas and voting power better reflect the growing influence of emerging and developing economies. To this end, the IMF must end its practice of appointing only European managing directors, just as the World Bank must start considering non-US citizens to be its president.
Lagarde’s departure represents a golden opportunity to put the IMF on the path toward a more effective and inclusive future. Seizing it means more than welcoming a new face at the top.