The world’s biggest aluminum (ALF25) makers are once again scrambling to secure the raw materials needed to make one of the most important industrial metals.
The material that is in so much demand is alumina - an intermediate product that’s processed from bauxite ore and fed into smelters to make aluminum. Alumina has proved to be very volatile in recent years. It has been affected by everything from sanctions on Russia’s top producer, Rusal, to events caused by climate change.
Aluminum producers lacking their own in-house supply are being squeezed, especially since prices for finished aluminum haven’t risen as quickly as the price of alumina.
Alumina prices hit a record last week (doubling in price in 2024), surpassing levels last seen in 2018, when U.S. sanctions on Rusal threatened to put the entire industry into a deep freeze.
The reason?
Production outages globally constrained an already tight market in 2024. Here are some of the hits alumina supply has taken this year…
In January, Alcoa (AA) announced the permanent closure of its Kwinana refinery in Australia. The ramp-down was scheduled to be completed by the third quarter.
In May, Rio Tinto (RIO) declared force majeure on deliveries from its refineries in Queensland due to restricted gas capacity levels.
Next, Century Aluminum’s (CENX) operations in Jamaica were briefly interrupted by Hurricane Beryl in September, and South32 (SOUHY) has flagged concerns about its Australian operations due to conditions on its operating license required by environmental regulators.
Finally, the West African nation of Guinea (ruled by a military junta) — a top bauxite supplier — blocked some exports. This latest shock came in October, when Guinea blocked Emirates Global Aluminium’s bauxite exports.
That triggered panic buying.
Guinea and China
Much of that panic buying on the Guinea news came from China, the world’s largest maker of aluminum. Its aluminum producers' output of finished aluminum hit an all-time high this year.
This price sensitivity to events in Guinea highlights how dependent China's alumina refineries have become on West African bauxite.
China's bauxite mining sector has been hit by multiple waves of environmental inspections, limiting domestic supply. This pushed more alumina refineries to look overseas for their raw material. Imports of Indonesian bauxite stopped in early 2023 after the Indonesian government banned exports in a drive to force its miners downstream into refining and smelting.
So China turned to Guinea, which has quickly emerged as China's primary bauxite supplier. The country now supplies 70% of China’s bauxite imports, with imports doubling between 2000 and 2023 to almost 100 million metric tons. Imports were up by another 13% in the first eight months of 2024.
So what could be the end result of this panic in the alumina market?
Aluminum Shortage Coming?
Soaring alumina prices compresses margins at the world's aluminum smelters, which convert the intermediate product into metal.
The London Metal Exchange (LME) cash price, indexed to Platts benchmark Australian alumina assessment, closed last week at $710.40 per metric ton, lifting the ratio to the aluminum price to more than 26%. The alumina-aluminum ratio was just 15% at the start of 2024, when alumina was priced at $350 per ton.
It is possible that aluminum smelters - especially in China - may need to cut production to limit their losses. This would tighten aluminum supplies globally and underpin a rally in prices.
Chinese port inventories of alumina have plunged to the lowest levels since at least 2015. With spot cargoes disappearing fast, traders and smelters have been approaching other sellers in western markets that they don’t usually buy from. In some cases buyers are queuing up outside alumina plants, according to industry researcher Mysteel Global, and reported by Bloomberg.
So it's a full-fledged panic. This will benefit one company mentioned earlier - Alcoa.
Alcoa and Alumina
The proof can be seen in the company’s latest earnings report, which came out on Oct. 16.
AA stock jumped as much as 10% in after-hours trading as strong alumina prices boosted quarterly earnings to the highest level in more than two years. Alumina accounted for almost 30% of the company’s revenue in 2023.
Adjusted EBITDA earnings in Alcoa’s alumina segment nearly doubled from the second quarter to $367 million. Company-wide net income of $90 million was the best performance since the second quarter of 2022.
CEO Bill Oplinger said, “Alumina is acutely short currently – it’s a very very tight market, so we have seen alumina prices run up rapidly over the last 90 days. The tightness should persist through the first half of next year.”
This upbeat mood comes a year after Oplinger took the helm and declared a “cultural change” for Alcoa. These changes included faster decision-making, operational tweaks and performance improvements.
Just since last October, the company has won conditional permission for its bauxite mines in Western Australia to keep operating, and it acquired its Australian joint-venture partner, Alumina.
Alcoa’s stock is already up nearly 20% this year and more than 53% over the past year, helped by rising aluminum and alumina prices. I think there’s more upside to come for Alcoa stock. One main reason is that alumina tends to be off most investors’ radar, given that pricing is not as readily available, as with other commodities.
It's exactly this overlooked factor that makes AA stock a buy below $45.
