TORONTO (miningweekly.com) – The successful government-led rebalancing of several Chinese industries has supported alumina and aluminium prices globally. However, smelter restarts might undermine prices in 2018, according to a new report by Bank of America Merrill Lynch (BofAML) Global Research.
The banking group pointed out on Monday that alumina and aluminium have both rallied in recent months, with alumina – a critical raw material for aluminium smelters recently outperforming finished aluminium, suggesting “idiosyncratic” factors are at play, analysts advised.
“Indeed, capacity utilisation rates at alumina refineries have bottomed globally, led by China. This is a dynamic that has been visible in other industries as well. Steel mills in China are, for instance, on track to achieve an 88% utilisation rate, making the country the healthiest steel market globally. This is remarkable and highlights the success that authorities have had with rebalancing domestic industries,” the global research team has found.
China's alumina producers have faced colossal headwinds on two accounts. Domestic bauxite availability has tightened after the Ministry of Environmental Protection shuttered mines in Shanxi and Henan, two hubs for alumina refineries. Now, angst has risen that mines in Guangxi and Guizhou may also be inspected next.
Further, according to BofAML, the government has announced a series of winter cuts at alumina refineries, which will, in all likelihood, sustain the domestic market tightness. “Indeed, we expect strong fundamentals to carry over into 2018,” BofAML stated.
Further downstream, against initial market expectations, China's authorities are now also implementing two-million tonnes of winter cuts at aluminium smelters, which come on top of the illegal capacity closures announced earlier this year.
While aluminium prices have risen ahead of actual improvements in the physical market, fundamentals are expected to ultimately catch up.
“Acknowledging also that winter closures are more pronounced in alumina than in aluminium, there is a risk that smelting margins may be squeezed further at non-integrated operators. As such, we maintain an aluminium price target of $2 250/t ($1.02/lb) in [the first quarter of 2018], although we are concerned that smelter restarts may ultimately cap the rally,” BofAML said.