Alumina: basic balance between supply and demand.

Metallurgical-grade alumina (aluminum oxide) is an irreplaceable major raw material for the production of electrolytic aluminum. The product has virtually no other application. Its supply/demand relationship is therefore somewhat rigid. The sales of alumina in the international market mainly take the form of long-term contracts and its price is 12%-17% of the pure aluminum price. These long-term contracts have ensured stability in the supply and the price of alumina.

1. Huge change of supply/ demand mode in recent years

As the aluminum industry in China is at the stage of rapid growth, the market price of alumina is making great fluctuations. A sincere cooperative relationship between the alumina sector and the electrolytic aluminum sector has not yet been established. Long-term contracts are a small proportion of the total trade, and a typical transaction is for spot goods. The price is sensitive to the supply/demand relationship. A slight oversupply or deficit causes a great price fluctuation for spot goods. As the completion of new and expanded alumina capacity is not coordinated with capacity expansion at electrolytic aluminum factories, uncertainty in the supply/demand relationship is aggravated.

The domestic supply/demand dynamic of alumina has changed greatly in recent years. The output of electrolytic aluminum increased dramatically from 2003 to 2005. Due to large investments and high requirements on technology and equipment in the continuous production, the development of alumina projects fell far short of the needs in the electrolytic aluminum sector. China had to depend on imported alumina for many years, resulting in a global supply shortage. The supply shortage and concomitant price rise of alumina led to an overall loss in the electrolytic aluminum sector. To subsist, large electrolytic aluminum plants extended their industrial chains and constructed their own alumina units. The price of alumina stayed high. Fat profits attracted power enterprises with resource advantage and capital strength to construct alumina units.

A new upsurge for alumina production was triggered. With the completion of new alumina units, the supply/demand relationship of alumina reversed in early 2006. The total supply amount reached 20.33 million tons and the demand was 18.68 million tons with a surplus of 1.65 million tons.

2. Rapid shift from oversupply to supply shortage in 2007

Due to the concentrated completion of alumina units from January to April 2007, the output hit a new high of 1.72 million tons a month. The import volume also hit a new high of 580 000 tons a month for the year. The supply therefore increased drastically. The shadow of oversupply dimmed market prospects. The total supply of alumina in China was 20.55 million tons from January to October and the demand was 20.12 million tons with a surplus of 430 000 tons. The expanded capacity of electrolytic aluminum started production in the second half of 2007. Although alumina had been in surplus from January to October and the surplus reached a new peak in April, the monthly supply from May to October was short of the demand. When winter came, the construction and production of alumina units were affected by the cold weather. Three new alumina facilities respectively in Guangxi Huayin Aluminium Co., Ltd. (1.6 million t/a), Henan Dengfeng Zhongmei Aluminium Company (400 thousand t/a) and Luoyang Xiangjiang Wanji Aluminium Co., Ltd. (800 thousand t/a), originally planned to be completed at the end of 2007, were postponed. Due to the heating of residences in the north of China, winter is the brisk demand season for natural gas. The serious supply shortage of natural gas caused a low operation rate in alumina companies. The supply amount of alumina in 2007 is estimated to be 270 000 tons in short and the previous status of oversupply was reversed.

The output of electrolytic aluminum grew constantly in 2007. The monthly output increased steadily from 950 000 tons in January to 1.13 million tons in October and the monthly demand for alumina also increased from 1.86 million tons to 2.21 million tons. It is estimated that the output of alumina in China was 19.60 million tons in 2007, 5.26 million tons were imported and the total supply was 24.86 million tons, the output of electrolytic aluminum was 12. 58 million tons, consuming 19.87 million tons of alumina, and the supply was short by 270 000 tons.

3. Ups and downs of market price

Due to the oversupply in 2006, the price of alumina hit a low of RMB2 250 per ton at the end of the year, close to the average production cost. New alumina firms including Binzhou Weiqiao Aluminum Science and Technology Co., Ltd., Shandong Chiping Yangguang Aluminum Co., Ltd., Shanxi Luneng Group Jinbei Aluminum Industry Co., Ltd. and Coalmine Aluminum (Sanmenxia) Co., Ltd. reached agreement on stabilizing the price of alumina. They no longer decrease price for sales promotion and increased the offer price of alumina to RMB2 500/t. Due to the supply deficit of natural gas in winter, some other alumina companies also cut back production. In mid-January 2007 these four alumina firms, together with Luoyang Xiangjiang Wanji Aluminum Co., Ltd. and East Hope (Sanmenxia) Aluminium Co., Ltd. reached agreement on pricing. They jointly increased the alumina price to RMB2 800/t and once again increased the price to RMB3 800/t on January 22nd, 2007. The price of alumina rose slightly to RMB3 900/t in February 2007and was maintained at that level from February to April 2007. China's output of alumina increased too fast and there was a small surplus in the market. The price of spot goods in some areas went down to RMB3 750/t in May 2007. Due to worries over future oversupply, the price dropped constantly to RMB3 250/t in early November 2007. With the impact from the expected output reduction of alumina and the supply deficit of natural gas in winter, the supply of alumina became tense and the price of spot goods increased steadily to RMB4 000/t in early December.

The alumina shortage is expected last up till February 2008 and the price will stay high. With the completion of new units and expansion projects after the second quarter of 2008, the price may decline slightly. Nevertheless, as the rising price of bauxite, the sustained high cost of alumina and the completion of electrolytic aluminum facilities will bring a new round of demand growth, any dip in the alumina price will be quite limited.

4. Future development restricted by resources

The growing output of alumina in China has triggered a shortage of bauxite resources. There are 520 million tons of bauxite reserves in China today. Based on the output of alumina in 2007, the amount of resources can only guarantee alumina production for less than a dozen years. The inadequacy of bauxite resources will become a major bottleneck for the development of the alumina industry in China. Bauxite resources and alumina productions are not generally collocated in China. The alumina output of Henan province is 39% of the national total, but the province has only 23% of the basic reserves of bauxite. The region around Guangxi and Guizhou provinces has 51% of the nation's reserves of bauxite, but the alumina output there is only 11%. From a medium and long-term perspective, the alumina industry around Guangxi and Guizhou has great potential for development.

Because of the bottleneck in bauxite resources, the price reduction of alumina will be quite limited. The development focus of the alumina industry is now shifting toward Guangxi and Guizhou and will result in changes in logistics and transportation. A mode of overall supply/demand balance for China with local oversupply will be likely developed.

5. Snow storm had grave impacts on nonferrous metal producers

According to the overall estimation by the National Bureau of Statistics, the loss caused by the snow storm in southern China January 2008 was estimated to be around RMB 110 billion.

The power stoppage caused by the snow storm had grave impacts on some nonferrous metal producers.

The production capacity of aluminum that has discontinued production in the first quarter is close to 1.0 million t/a and the output that has been reduced each month accounts for around 7% of the national total output. Hence alumina will be oversupply and the price of electrolytic aluminum will be increased.

The price of aluminum in the domestic market started to increase in early February and has already reached RMB 18 500 per ton in mid-February, being RMB500 per ton higher than one week ago.

Even if the power supply becomes normal in the second quarter, electrolytic aluminum production lines will need some time to restore production. The output of electrolytic aluminum and the demand for alumina will therefore still be affected at that time.