China alumina prices drop on growing supply as production costs fall

Prices of alumina in China have fallen more than 10 percent since January and are unlikely to recover this year as lower production costs encourage refineries to boost output, industry sources in the country said.

Refiners usually sell alumina to aluminium smelters as it is the key ingredient in the production of that metal, which is used in everything from cars to cooking utensils.

Weaker prices for the raw material could boost aluminium output in the world's top consumer and producer of the metal, curbing demand for imports. Alumina typically accounts for around 40 percent of costs in primary aluminium production.

Spot alumina traded at about 2,350 yuan to 2,550 yuan ($379 to $411) a tonne in China this week, compared to around 2,800 yuan in January, smelter sources said. The prices were lower than about 2,550-2,650 yuan for duty-paid imports, traders said.

A spot alumina shipment was sold to China at $347 a tonne this month, compared to over $350 in April.

In contrast, the price of primary aluminium in China had risen more than 1 percent from this year's low in January to 12,785 yuan on Thursday, supported as large smelters limited spot sales.

"The cost of imports has been higher than local alumina prices this year and most of the inflows were term shipments," said a trading manager at a state-owned aluminium smelter. He declined to be identified as he was not authorised to speak with media.

China's alumina imports dived 40 percent from a year ago in the first four months of 2015.

The trading manager said production costs at many alumina refineries in China had dropped due to lower prices for coal and power. He estimated current production at around 1,600 yuan to 2,300 yuan a tonne.

That is down by about 200 yuan from the final quarter of 2014, with higher profits prompting refineries to produce more alumina, said Xu Hongping, analyst at China Merchants Futures.

China's alumina production stood around a record 4.8 million tonnes in March and April. If that level of output was annualised it would equate to around 57.6 million tonnes of the country's annual production capacity of more than 60 million tonnes.

Xu estimated at least 2 million tonnes of new capacity started production in May and June. But she said most of that was owned by aluminium smelters, cutting their alumina purchases.

Increased output would weigh on domestic alumina prices in the second half, even though some 2 million tonnes of new aluminium capacity may begin production, she said.

Two tonnes of alumina are typically used for one tonne of aluminium.

But declining alumina prices could be a sign of slowing aluminium production growth in China, said Nic Brown, commodity research head at Natixis. ($1 = 6.2061 Chinese yuan renminbi)

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