In August Core Consultants reviewed a feasibility study for a bauxite deposit in Guinea. The report focused on the economic feasibility of developing the deposit along with commissioning an alumina smelter and aluminum refinery.
In fulfillment of the study, Core Consultants’ considered whether there may be alternative sources of bauxite available and also looked at the specific market expectations for bauxite, alumina and aluminium.
Looking at bauxite, prices over the last year have held up, while those of other commodities have fallen drastically. As ever, the main driver behind these prices was China whose demand has created a spot market for the commodity.
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.
- Australia has tried to fill the gap, though environmental approvals are causing delays.
- Indonesia was another major supplier, tough government imposed an export tax, paving the way for Malaysia to take its place.
- Malaysia was therefore the largest supplier to China in 2015, though its bauxite industry remained unregulated and exports grew too fast. This has since caused a backlash from the all too familiar environmentalists- the same guys who managed to delay Australia’s rare earth producer, Lynas from getting off the ground, nearly bankrupting the mining junior in the process.
- Even if Malaysia was left to carry on supplying uncapped, the 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).
These factors present an opportunity for bauxite investors. However, the upside may be capped by an oversupply in the aluminium market which is why we started to see a downturn in bauxite prices towards the end of last year.
If we consider aluminium, despite the significant number of closures and idled capacity over the last year (~2.1m tonnes in 2015 and 2016), China is increasing its supply, particularly of semi-manufactured products which is pushing the aluminium market into surplus.
Furthermore, as shown in the table below, existing stocks of aluminium are available to plug any deficit that may arise. And beyond this growth in aluminum scrap availability may displace the need for primary aluminium units.
Source 3: Core Consultants; RBC Capital Markets,
Therefore, while the raw material, bauxite, is the limiting factor, changes to the dynamics in how we source supply of aluminium, may limit price increases.