Elevated alumina prices to feed on China aluminium producer profits
By Siyi Liu and Mai Nguyen
BEIJING/HANOI, Sept 30 (Reuters) -Healthy demand and improving power supplies will create strong tailwinds for aluminium output in China, while tightening supplies and lifting prices of raw materials bauxite and alumina will constrain producer profits.
High output will weigh on global prices of aluminium used in the transport, construction and packaging industries, further undermining revenues for companies in top producer China.
China's aluminium producers have made rising profits due to elevated prices of the metal on the London Metal Exchange (LME) hitting near-two-year highs of $2,799 CMAL3 a metric ton in May.
Prices have eased since May, but rebounded on Sept. 27 to a 16-week high at $2,695, boosted by a weaker dollar and a series of supportive policies and stimulus from China.
State-backed research house Antaike estimates the aluminium industry's average profit hit 2,818 yuan ($401.68) per ton in the first half of this year, more than doubling from the 1,211 yuan per ton a year earlier.
Citing rising prices and sales, companies including major producer Yunnan Aluminium 000807.SZ reported sharp increases in first-half profit.
However, since June as aluminium prices started to slide, these profits shrank to near 2,000 yuan per ton in August, still was described by smelters as reasonable.
"Higher alumina price is likely to limit our profits, keeping it at a level around 2,000 yuan that most smelters happy to maintain production," said a source at a major aluminium smelter source who preferred to remain anonymous.
The most-traded alumina futures SAOcv1 on the Shanghai Futures Exchange closed at 4,200 yuan a ton on Sept. 27, up 25% so far this year and 51% higher from when the contract was launched last June.
PRODUCTION POWER
Producer profits have been aided by robust demand in China, where Antaike estimates primary aluminium consumption rose 8.2% in the first half of the year to 22.1 million tons.
Analysts at Macquarie forecast a shortfall of 2.1 million tons in the Chinese aluminium market this year, likely to be bridged by imports.
China accounts for around 43 million tons, or 60%, of global aluminium production estimated at around 73 million tons this year. That number is close to the capacity ceiling of 45 million tons set by the Chinese government in 2019.
That upper limit has supported the industry's profits, said Liu Jie, a consultant at Wood Mackenzie, who expects this trend to continue until China's domestic aluminium scrap supply increases substantially.
However, production will rise, particularly in Yunnan province where supplies of power key for aluminium smelting are set to improve further after recording an increase of 18.5% in electricity generated between January and July this year.
Shanghai Metals Market has raised its forecast for Yunnan's aluminium output in the fourth quarter to 10.90 million tons, from 10.78 million tons previously, citing lower chances of power-related production cuts during the dry season.
Higher production overall will push up prices of alumina, a raw material accounts for about one third of the costs for making aluminium. Alumina is produced by refining bauxite.
"We will not see a sudden fall in alumina demand in the fourth Q4 like last year," said Wood Mackenzie aluminium analyst Chen Xinlin, adding that high prices of imported bauxite would be a key hurdle for some smelters looking to produce more.
($1 = 7.0156 yuan)
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Reporting by Siyi Liu in Beijing and Mai Nguyen in Hanoi; writing by Pratima Desai; editing by David Evans
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