Resources and Energy Quarterly March quarter 2012

Aluminium

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  Aluminium prices are expected to decline in 2012, compared with 2011. However, prices are projected to increase, on average, between 2013 and 2017, underpinned by stronger consumption growth relative to production growth.
  
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  Over the medium term, aluminium consumption is projected to increase as demand in the major semi-fabricated markets strengthens, providing a positive impetus to price.
  
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  Aluminium production growth is expected to occur mainly in emerging economies as a result of comparatively low energy costs.
  
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  Australian aluminium export earnings are expected to moderate over the outlook period associated with a decline in domestic production and lower export volumes.
  

After reaching a peak of around US$2800 a tonne in May 2011, aluminium prices averaged US$2437 a tonne in 2011, 12 per cent higher than prices in 2010 (see Figure 1). In 2012, aluminium prices are forecast to decrease by 6 per cent, relative to 2011, to average US$2287 a tonne in response to weaker growth in world aluminium consumption associated with an assumed decrease in world economic growth. In 2012, the decrease in the aluminium price is expected to be constrained by higher production costs, including rising electricity and raw material costs that has already resulted in a number of aluminium producers reducing their production capacity.

Over the remainder of the outlook period (2013 to 2017), aluminium prices are projected to increase, in real terms, peaking at US$2640 a tonne (in 2012 dollars) in 2015 before easing to around US$2530 a tonne in 2017 (see Figure 2). The increase in prices reflects robust consumption growth in line with an assumed improvement in the economic outlook in OECD economies. Between 2013 and 2015, aluminium production is projected to increase at a rate less than consumption growth. This is partly because strong aluminium production growth in non-OECD economies will be partially offset by smelter closures in many OECD economies. In 2016 and 2017, aluminium prices are projected to moderate to around US$2500 a tonne (in real terms) in response to increased aluminium production, particularly from the Middle East. Global aluminium stocks are projected to decrease to 4.6 weeks of consumption by the end of 2017, compared with 8.8 weeks of consumption at the end of 2011.

In 2011, world aluminium consumption is estimated to increase by 5 per cent, compared with 2010, to total 42 million tonnes following increased demand in all major aluminium-consuming economies. The rate of growth in world aluminium consumption is forecast to weaken in 2012 due to assumed lower economic and industrial production growth in some key aluminium markets. In 2012, global consumption of aluminium is forecast to increase by 4 per cent, relative to 2011, to total 44 million tonnes.

Over the medium-term, world aluminium consumption is expected to be underpinned by demand from the construction, aerospace and automobile manufacturing sectors, particularly within emerging economies. Between 2013 and 2017, world aluminium consumption is projected to increase at an average annual rate of 7 per cent to reach 62 million tonnes by 2017.

…supported by consumption growth in China

In 2011, world aluminium consumption in China is estimated to have increased by 11 per cent, compared to 2010, to total 18 million tonnes. Over the outlook period, China is expected to account for an increasing share of world growth in aluminium consumption. Growth in China’s aluminium consumption out to 2017 is expected to be supported by the economy’s continued urbanisation and industrialisation. In particular, continued urbanisation that requires additional housing and infrastructure and which is aluminium intensive will support growth in aluminium consumption.

Further support for growth in China’s aluminium consumption over the medium term will be rising household incomes that are expected to result in an increase in demand for domestically produced aluminium-intensive consumer durables, such as white goods and automobiles. The potential growth in China’s aluminium consumption is illustrated by its relatively low per capita aluminium intensity compared to the average intensity of major industrial economies such as Germany and the US (see Figure 3).

China’s relatively low consumption intensity, large population and rapidly growing GDP per person indicates that there is substantial scope for further growth in aluminium consumption over the outlook period. As a result, China’s aluminium consumption is projected to increase at an average annual rate of 10 per cent, between 2012 and 2017, to reach 31 million tonnes in 2017.

In 2011, aluminium consumption in OECD economies is estimated to have increased by less than 1 per cent, compared to 2010, to total 16 million tonnes. Aluminium demand growth in 2012 in the OECD is forecast to remain weak, particularly in the European Union (EU) and Japan. In the US, aluminium consumption is forecast to increase underpinned by an upturn in activity within the aerospace and transportation manufacturing sectors.

Over 2013 to 2017, aluminium consumption in the OECD is projected to increase, underpinned by an assumed strengthening of economic growth in the EU, the US, and Japan. By 2017, OECD aluminium consumption is projected to total 20 million tonnes, or an average annual increase of 5 per cent a year between 2013 and 2017.

Aluminium production to respond to falling prices

In 2011, aluminium production is estimated to have increased by 6 per cent, relative to 2010, to total just below 44 million tonnes. The growth in aluminium production is primarily due to higher levels of output from China, the Middle East and India. In 2012, world aluminium production is forecast to increase by 2 per cent and to slightly exceed 44 million tonnes in total as a result of new smelters starting up in China and India. This growth, however, is expected to be offset by lower output from OECD economies where there have been a number of announced reductions in plant capacity.

Over the remainder of the outlook period (2013 to 2017), aluminium production is projected to increase at an average annual rate of 7 per cent a year, reaching 61 million tonnes in 2017. Over this period, the majority of production growth is expected to occur in non-OECD economies.

Non-OECD economies to underpin world aluminium production growth

Over the medium term, the growth in aluminium smelting capacity is expected to largely occur in countries where companies can secure long term, competitively priced power contracts.

China is projected to remain the largest aluminium producer over the outlook period. In 2011, China accounted for 41 per cent of world production; its large share reflecting cheap input costs such as labour and electricity. The Chinese Government is currently supporting the modernisation of its aluminium production industry by shutting down old and inefficient capacity and replacing these plants with smelters based on modern technology. Despite the shutdown of some existing capacity, China’s aluminium production is, nevertheless, projected to increase at a rate of around 6 per cent a year, between 2012 and 2017, to reach 25 million tonnes in 2017.

Supported by the availability of relatively cheap natural gas, there are plans to significantly expand aluminium production capacity in the Middle East. New projects scheduled to start up in the Middle East over the outlook period include Alcoa’s and Ma'aden’s Ras Al-khair smelter (annual capacity of 740000 tonnes) and the Sino Saudi Jazan smelter (annual capacity of 1 million tonnes) in Saudi Arabia; and EMAL’s Abu Dhabi smelter phase II expansion (520000 tonnes) in the United Arab Emirates (UAE). This new capacity is expected to result in production in the Middle East increasing at an average annual rate of 18 per cent between 2012 and 2017 to reach 9 million tonnes in 2017.

India’s aluminium production is expected to grow strongly over the period to 2017 as a result of the commencement of up to five smelters with a total capacity of 2 million tonnes a year. India’s aluminium production is projected to increase by 22 per cent a year, between 2012 and 2017, to reach 5 million tonnes by 2017.

OECD production growth weak

Aluminium production in the OECD is expected to grow at below 1 per cent a year, between 2012 and 2017, associated with increasing capacity utilisation that is expected to be largely offset by a reduction of existing capacity due to the closure of a number of older smelters.

As a result of increased cost pressures a number of aluminium producers have announced plans to curtail production capacity in the OECD. In 2011, Alcoa announced plans to permanently close a number of its higher-cost smelting operations in response to high energy costs and lower aluminium prices. The closures include the Portovesme smelter in Italy and La Coruña and Avilés operations in Spain as well as two smelters in the US (Rockdale, Texas and Alcoa, Tennessee). Together, the production plant closures amount to a reduction of 531000 tonnes a year of production capacity. Rio Tinto Alcan has announced the permanent closure of the 275000 tonne a year Zeeland Aluminium smelter (ZALCO) in the Netherlands. Norsk Hydro also announced in November 2011 that it would not restart idled capacity at its Sunndal primary aluminium smelter (annual capacity of 400000 tonnes) in Norway until market conditions improve.

The major additions to world capacity over the outlook period are expected to come from a number of projects currently at varying stages of planning and development (see Table 1).

In 2011–12, Australia’s aluminium production is forecast to remain unchanged at around 1.9 million tonnes relative to 2010–11. In 2012–13, aluminium production is forecast to decline by 10 per cent to 1.7 million tonnes as a result of the closure of a 60000 tonne a year pot line at the Kurri Kurri aluminium smelter. The closure was announced by Norsk Hydro in January 2012.

Over the remainder of the medium term (2013–14 to 2016–17), the outlook for Australian aluminium production is uncertain. In February 2011, Alcoa announced that it was undertaking a review of operations at its Point Henry smelter (annual capacity 190000 tonnes) in light of the high cost environment in which it is operating. High costs reflect rising electricity, labour and other input costs and a high value of the Australian dollar. The review is expected to be completed in June 2012. Rio Tinto has also announced plans to review its Pacific Aluminium business, which includes the Bell Bay smelter in Tasmania, Boyne Island smelter in Queensland, and Tomago smelter in NSW.

On the basis of these company announcements it is assumed that Australian aluminium capacity will be curtailed over the outlook period. By 2016–17, Australia’s aluminium production is projected to decrease to around 1.2 million tonnes, a decrease of 38 per cent from 2010–11 levels.

In 2011–12, aluminium exports are forecast to remain unchanged, relative to 2010–11, at around 1.7 million tonnes, as a result of stable aluminium production (see Figure 4). Export volumes are forecast to decrease by 10 per cent, relative to 2011–12, to 1.5 million tonnes in 2012–13, in line with decreases in Australia’s aluminium production. Over the outlook period, export volumes are projected to decrease at an average annual rate of around 9 per cent (2013-14 to 2016–17) because of reduced domestic aluminium production

In 2011–12, the value of aluminium exports is forecast to decrease by 8 per cent, compared to 2010–11, to $3.8 billion due mainly due to lower prices. In 2012–13, Australian export earnings are forecast to decrease by a further 10 per cent, relative to 2011–12, to total $3.4 billion, largely because of lower export volumes. Over the remainder of the outlook period (2013-14 to 2016-17), aluminium exports earnings are projected to decrease as a result of lower aluminium export volumes. The value of aluminium exports is projected to decrease at an average annual rate of 6 per cent between 2013-14 and 2016-17, to total $2.7 billion in 2016-17 (in 2011-12 dollars).

Figure 4: Australia’s aluminium exports

Please refer to page 102 of the Resources and Energy Quarterly – March quarter 2012 PDF version.

Alumina

Alumina prices recovery to lag aluminium prices

In 2011, spot alumina prices averaged US$384 a tonne, an increase of 15 per cent from 2010. Spot alumina prices are forecast to fall in 2012 as world aluminium production growth weakens, which is expected to lead to a reduction in alumina demand. Over the remainder of the outlook period (2013 to 2017), alumina prices are projected to increase, in real terms, as a result of stronger aluminium production growth and, hence, alumina demand. Rising alumina production input costs associated with higher electricity, caustic soda and other raw materials prices are expected to provide further support for prices over the medium term. Between 2013 and 2017, the spot alumina price is projected to increase at an average annual rate of 1 per cent to US$363 a tonne (in 2012 dollars) by 2017.

In 2011–12, Australia’s alumina production is forecast to increase by 4 per cent to around 20.3 million tonnes, as production at Queensland Alumina’s refinery is assumed to return to capacity following flood-related impacts in the first half of 2011. Production at BHP Billiton’s Worsley refinery is also expected to increase in the March quarter 2012 following the completion of a 1.1 million tonne a year expansion. Australia's alumina production in 2012–13, is forecast to increase by around 13 per cent to 22.9 million tonnes underpinned by the completion of an expansion at Rio Tinto Alcan's Yarwun refinery near Gladstone. When the expansion is complete in late 2012, the Yarwun refinery capacity will increase by 2 million tonnes to 3 million tonnes a year.

Australia’s alumina production is projected to peak in 2013–14 at 24 million tonnes as production reaches full capacity at the expanded Yarwun and Worsley refineries. Over the remainder of the outlook period (2014–15 to 2016–17), Australia's alumina production is projected to remain at around 24 million tonnes as there are no further capacity expansions scheduled to be completed within this period.

Australian alumina export earnings to grow over the outlook period

Underpinned by higher production, Australian export volumes of alumina in 2011–12 are forecast to increase by 4 per cent, relative to 2010–11, to total 16.8 million tonnes (see Figure 5). In 2012–13, Australia's alumina exports are forecast to increase by a further 16 per cent to 19.5 million tonnes. By 2016–17, Australia's alumina exports are projected to reach 22 million tonnes, as a result of higher alumina production and an increased availability of supply associated with lower domestic consumption in the aluminium industry.