EDITOR: | July 28th, 2016 | 1 Comment

China demand for bauxite holds prices

| July 28, 2016 | 1 Comment
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Bauxite prices over the last year have held up while those of other commodities fell drastically.

As ever, the main driver behind these prices was China, whose demand created a spot market for bauxite. However, given the capital costs associated with smelters and refiners, the aluminium industry in the West has largely been vertically integrated right back to the bauxite mines themselves. In fact, at present there does not seem to be any independent bauxite miners supplying any significant volumes into the Chinese market.

The Chinese, on the other hand, have long relied on a mixture of large scale mines and artisanal operators to feed into the alumina industry. Chinese bauxite is relatively low grade but, since they do not have to transport it great distances, they have been able to mine it economically.

However, increased demand for aluminium has put placed pressure on bauxite supplies, further exacerbated by the fact that the Chinese deposits are becoming depleted. The country is currently importing around 30-40% of its bauxite requirements and 10% of its alumina needs. The Australian bauxite sector has tried to fill the gap and there are a few independent bauxite mining companies (listed and private) signing take-off agreements with various Chinese entities. However, many of these companies face long delays in getting environmental approvals for their proposed mines so the short-fall remains.

The other major supply to China was from Indonesia and that government imposed an export tax (currently under review) on un-beneficiated ore, virtually cutting off the supply. Another supply- constraining event occurred when India decided to double its export duty on bauxite in May 2014.

However Malaysian exports rose to fill the gap becoming the largest supplier to China in 2015 from fourth place in 2014. This placed a price cap on bauxite price increases. Australia also started to employ new technologies to reduce the costs of bauxite mining and alumina processing, passing that benefit in the form of lower prices. As such, bauxite prices particularly in Australia, started to trend lower towards the second half of 2015. The fall in global freight charges, led by low oil prices, fed into this commodity price behaviour.

Since the start of the year, Malaysia has placed a mining ban on bauxite mining. After emerging as the leading exporter to China in 2015, the activity took a toll on the environment and the public turned against the country’s unregulated bauxite industry accusing it of turning the waters and the seas red near Kuantan, the capital of Malaysia’s third largest state. Malaysia has been vocal about mining activities that are not in line with environmental standards and became famous over the last three years when it managed to delay Australian rare earth producer, Lynas Corp., nearly bankrupting the company through stalling its commencement date.

This ban has been extended until July 2016 and represents a tangible example of the fact that Malaysia cannot be relied on indefinitely to fill the bauxite gap. Furthermore, it confirms that miners and refiners need to focus on community expectations and social licenses. Other similar examples within the bauxite industry includes Indian bauxites whereby communities managed to restrict access to bauxite deposits. As the trend towards more favourable environmental practices continues, this is expected to place upward pressure on costs and potentially lead to higher prices.

Going forward,  while mining costs are increasing, demand is increasing, available deposits are declining and companies are needing to source bauxite from more remote locations, the biggest hindrance to price increases is the ongoing surplus of alumina and aluminium, as well as the ability to recycle aluminium instead of producing virgin units.

Furthermore, it is unlikely that Malaysian bauxite will take the place of Indonesian material in the long term. Malaysian bauxite is not particularly good quality and tends to have a high moisture content, rendering it potentially dangerous to ship (liquefaction of the ore). Moreover, the Malaysian government is now considering imposing an export tariff. Given the time it would take to bring a mine into production – particularly if railways and ports need to be built or refurbished –  there is speculation and Core Consultants’ tends to agree with this view, that in a couple of years’ time the refineries could potentially run out of ore as such refineries and smelters are scrambling to purchase or invest in bauxite deposits.


Lara Smith

Editor:

A Sr. Editor and Analyst for InvestorIntel and Managing Director and Founder of Core Consultants, Lara is an internationally recognized expert in the field of ... <Read more about Lara Smith>


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  • China demand for bauxite buoys prices – Core Consultants : Core Consultants

    […] The article was first published on InvestorIntel […]

    July 29, 2016 - 12:38 PM

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