The price of aluminum is up about 30 percent year-to-date, and experts believe rising raw material costs could drive prices even higher.
Alumina, the raw material used to make aluminum, has seen its price soar even more than aluminum itself — it’s surged 56 percent since August due to China halting some production in an effort to reduce emissions during the winter heating season. The move sent traders and smelters rushing to snap up the raw material.
Mark Hansen, chief executive at Concord Resources, told Bloomberg that upstream supply “has been really squeezed” even though most smelters aren’t expected to close permanently. He added that smelters are “stocking up on alumina for when they restart production.”
Australian firm Alumina (ASX:AWC) noted in a September presentation that Chinese production cuts this winter will reduce aluminum output by 1 million tonnes, with alumina production sinking by 2.5 million tonnes. Given that about 2 tonnes of alumina are needed to make 1 tonne of aluminum, the company is calling for a net alumina shortage of 0.6 million tonnes.
As of Wednesday (November 1), aluminum was trading at $2,139.50 per tonne on the London Metal Exchange; meanwhile, alumina was at $479 per tonne on October 26, up from $306 at the beginning of August. That places alumina at about 22 percent of the aluminum price, which is a record high.
UBS Group (NYSE:UBS) analysts believe the current ratio between aluminum and alumina prices is “extreme” and not sustainable unless aluminum prices increase or alumina prices decrease.
In other alumina news, major miner Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO) decided on Tuesday (October 31) to add two alumina refineries in Australia to its Pacific Aluminum smelting unit. The company is attempting to sell the division, and hopes that by adding the refineries it will see better success than in the past — so far it has unsuccessfully tried to sell the business in 2011 and 2015.
Sources told Reuters that Glencore (LSE:GLEN), Liberty House and Rusal (HKEX:0486) have expressed interest in the group of assets, and noted that Rio Tinto could double the initial $1-billion sale price by including the refineries. “If ever there was a time to have a supply source for alumina outside of China, it’s now,” said Argonaut analyst James Wilson.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.