Market situation

mound of alumina 

Bauxite and alumina

The global alumina market was balanced at the end of 2012 influenced by supply disruptions, mainly in India. Chinese alumina imports for 2012 amounted to 5 million mt, up from 1.9 million mt in 2011, driven by favorable price differentials and limited bauxite availability.

Alumina prices increased throughout 2012, ranging from a low of USD 303 per mt in January and ending the year with a high of USD 333 per mt. Prices averaged USD 319 per mt for the year in total. As a percentage of LME, alumina prices varied during the year due to the volatile LME ranging between 13.5 percent and 17.4 percent. Average prices for 2012 were 15.6 percent of LME, the same as the previous year.

During the year the price of imported bauxite in China rose more than ten percent due to temporary restrictions and export tax on Indonesian exports. See Business description - Bauxite & Alumina - Industry overview - "Bauxite and alumina price developments" for more information.

 

aluminium rods

Primary Aluminium

Three-month LME aluminium prices were relatively weak throughout the year, averaging about USD 2,120 per mt in the first half of 2012 compared with an average of USD 1,980 per mt in the second half of 2012. Prices were volatile, reaching a peak of USD 2,350 per mt in late February and a low of USD 1,830 per mt in August. The year ended with a price around USD 2,100 per mt.

Global demand for primary aluminium (excluding China) increased moderately compared to 2011. Corresponding production decreased, mainly due to closures and substantial production disruptions. As a result, the market was relatively balanced in 2012. Annualized production increased in the final quarter of 2012, amounting to 25.6 million mt. Annualized consumption declined, however, amounting to 25.1 million mt. New greenfield projects are expected to come on stream during 2013. Demand for primary aluminium is expected to grow by about 2-4 percent in 2013.

Demand for primary metal in China increased around 8 percent in 2012, from 19.4 million mt in 2011 to 20.9 million mt in 2012. The market was largely balanced throughout 2012 and is expected to remain so in 2013.

LME stocks increased slightly from 5.0 million mt at the end of 2011 to around 5.2 million mt at the end of 2012. Most of the metal in warehouses continues to be owned by financial investors. Total inventories, including unreported inventories, were estimated to be around 12.4 million mt at the end of 2012.

Demand for extrusion ingot and foundry alloys in Europe weakened during 2012 and is expected to remain soft into 2013. Consumption of sheet ingot was stable compared to 2011. No significant increase in consumption is expected in 2013. The market for wire rod exhibited a solid increase during 2012 and is expected to continue with a positive development into 2013.

In the U.S. and Asia, demand for extrusion ingot and foundry alloys has been positive during 2012 and is expected to remain so in 2013.

 

rolls of aluminium

Rolled Products

The European market for flat rolled products declined compared to the previous year. Most of the decline occurred in the first half of 2012 due to strong demand and restocking activities in the first half of 2011. Demand in the second half of 2012 remained around the same soft level experienced in the corresponding period of 2011. Margins for standard products fell sharply compared to the high margins achieved in 2011. This was mainly due to rising ingot premiums, increased import pressure and the overall weak economic environment.

Demand in the automotive segment was stable. Effects of lower car production were offset by increased use of aluminium components, for premium brands in particular. Car production continues to be supported by strong demand for premium brands in China. Due to the weak economy in Southern Europe in particular, demand within building and construction markets declined further from the weak level experienced in 2011. Demand in Northern Europe remained firm for this market. Consumption in the beverage can market increased in 2012 while shipments of foil from European producers were impacted by imports from Asia. Demand for general engineering applications declined somewhat due to lower industrial activity.

 

waterfall

Energy

In the first half of 2012, Nordic electricity spot prices were generally at significantly lower levels than the first half of 2011, mainly due to a strong hydrological balance from the beginning of the year. Prices gradually increased during the autumn due to a deteriorating hydrological balance. By the end of 2012, water reservoirs in Norway were 70 percent of full capacity, which is slightly below normal.

In 2012, total power consumption in the Nordic market increased by 6 TWh to 386 TWh. Total power production increased by 26 TWh to 401 TWh. Power production in Norway reached a record level, amounting to 146 TWh in 2012. This was 20 TWh higher than 2011.

 

Structural developments

As a result of industry consolidation, relatively few companies are producing a substantial portion of primary metal on a global basis. Hydro, the sixth largest producer, increased its capacity by nearly 50 percent in 2011, with the full ramp up of Qatalum in Qatar and the integration of the Albras smelter in Brazil. Several important smaller producers in emerging markets exhibit strong growth ambitions. However, access to sufficient bauxite resources appears to be a constraint. There are also several new operators in China, which are presently focusing on supplying the Chinese market.

Most companies appear to be targeting integration into both energy and bauxite, while the focus on downstream integration has been lower. As a result, the downstream aluminium industry has evolved significantly, with consolidation as well as spin-offs from large integrated aluminium companies. In 2012 there were only two major global integrated aluminium companies - Alcoa and Hydro. Hydro is participating in a further restructuring of its downstream business with the announcement of the planned Sapa joint venture which is expected to be completed in the first half of 2013. Sapa is expected to be the world's largest extrusion company.

Bauxite and alumina price developments

Bauxite and alumina prices have been strongly influenced by developments in China, which is heavily dependent on imported bauxite. In 2012, China imported roughly 40 million mt of bauxite, representing about 40 percent of its raw material requirements. During the year the price of imported bauxite in China rose more than ten percent to USD 53 per mt, the highest level since 2008. The increase resulted from temporary restrictions and export tax on Indonesian exports. In 2012, Indonesian bauxite represented around 70 percent of total Chinese bauxite imports. As a result of the future uncertainty regarding the availability of bauxite from Indonesia, China is facing supply challenges in the Pacific region and substantially higher freight costs for bauxite sourced from the Atlantic region.

Alumina prices, as a percentage of LME have been increasing. Since 1990, average annual contract prices have risen from a level of around 12 percent of LME reference prices to around 15-17 percent in 2012. The Platts alumina price index has gained further support in the industry and represents the main reference for short and medium term contracts. This trend is expected to continue.

Aluminium price developments

Primary aluminium is traded on various metal exchanges, primarily the London Metal Exchange (LME) which was recently sold to Hong Kong Exchanges & Clearing Ltd., the world's second largest bourse company by value. The Shanghai Futures Exchange (SHFE) has grown in importance for international trade of standard ingots with China. However, China has followed a policy of promoting a balanced internal market, and has used incentives to discourage the export of primary metal, while encouraging the export of higher-value added fabricated and semi-fabricated products.

Aluminium prices are heavily influenced by economic and market developments. During the financial crisis of 2008/2009, prices exhibited an historic decline as turmoil in the financial markets spread into the general economy. Prices were volatile but improved continuously until the first half of 2011, before falling to around USD 2000 at the end of the year. Prices continued to be volatile throughout 2012. Average prices were relatively low, amounting to USD 2050 per mt for the year as a whole.

Reported inventories increased significantly in the previous downturn, more than doubling from under 3 million mt to over 7 million mt, representing about 2 months of global consumption. Inventories have remained at around this level with a large portion of the metal owned by financial investors taking advantage of low interest rates, warehouse incentives and contango in the forward aluminium markets. The increase in inventories of standard ingot has resulted in a tight physical market and historically high ingot premiums. We expect this situation to continue under present economic conditions.

Cost developments

Alumina prices, as a percentage of LME have been increasing. Since 1990, average annual contract prices have risen from a level of around 12 percent of LME reference prices to around 15-17 percent in 2012. The Platts alumina price index has gained further support in the industry and represents the main reference for short and medium term contracts. This trend is expected to continue.

Over the last six years, the aluminium industry cost curve has increased on average about USD 300 per metric ton, mainly due to higher input costs driven by strong demand for raw materials in emerging economies and in China in particular. More than half of the increase is related to power with the remainder reflecting higher costs mainly for carbon and alumina. The upward trend paused temporarily in 2009 as commodity prices in general fell. However, costs increased again in 2010 and 2011 before stabilizing at a relatively high level in 2012. Costs are expected to increase somewhat in 2013.

In the future, primary aluminium production is expected to be developed in energy-rich areas where power prices are more competitive than in developed energy markets such as Europe and the U.S. Such countries and regions are expected to include the Middle East, India and some countries in Africa and Asia. China will continue to be the most important producer and consumer of primary metal.


Due to existing sales contracts, Hydro has limited volumes available for sale for the next few years. As a result, short-term alumina market developments have limited influence on Hydro's earnings for the period.


Updated: October 11, 2016