COLUMN-Bauxite supply no hindrance to China's aluminium boom: Andy Home

(Repeats June 9 column with no changes. The opinions expressed here are those of the author, a columnist for Reuters)

By Andy Home

LONDON, June 9 (Reuters) - Who remembers the Indonesian bauxite ban now?

When the country prohibited exports of unprocessed minerals in January 2014, the big loser was expected to be China.

At the stroke of a presidential pen China lost its main supplier of both bauxite and nickel ore, seemingly placing at risk its giant nickel pig iron and aluminium sectors.

The nickel ore ban is still a slow-fuse story, only slowly permeating that market's supply dynamics.

But the loss of Indonesian bauxite is apparently just a non-story.

Chinese aluminium production simply carries on rising and accounting for an ever increasing share of global output, almost 55 percent in April compared with just 42 percent a couple of years ago.

New (KOSDAQ: 160550.KQ - news) smelters are ramping up in China's northwestern provinces even while other provinces keep alive older plants which, on paper at least, should have closed long ago.

Indeed, the flow of surplus metal out of China in the form of semi-manufactured products is a source of increasing alarm in the rest of the world.

It's a surprising outcome for an industry that was perceived to be operating an unsustainable raw materials policy even before Indonesia slammed the door on the largest single flow of bauxite to China.

Yet there are no signs of stress in the aluminium raw materials chain and it is becoming increasingly clear that it won't be a shortage of bauxite that stops the Chinese smelter juggernaut.

ALUMINA CAPACITY RISES

Alumina (Other OTC: AWCMF - news) sits between bauxite and aluminium in the light metal's production process chain.

And when it comes to alumina, China appears to be becoming increasingly self-sufficient.

The country has historically imported alumina to fill any gap in its domestic supply-demand balance.

Alumina imports last year totalled 5.3 million tonnes. That represented a year-on-year increase of 38 percent but the increase may have been a displaced reaction to the Indonesian bauxite ban.

Looked at over a longer time-frame, imports of alumina have been gradually trending lower for the last 10 years or so despite the huge increase in demand from all those new aluminium smelters.

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Graphic on China's alumina imports:

http://link.reuters.com/vur84w

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That's because Chinese alumina production capacity has increased in tandem with smelter capacity, albeit with occasional mismatches that feed through into fluctuations in import levels.

And right now Chinese alumina production is growing faster than aluminium production with respective growth rates of 15 percent and 11 percent in the first four months of this year.

Unsurprisingly, imports have trended lower since the start of 2015, falling by almost 40 percent from the January-April 2014 period.

Unsurprisingly too, domestic alumina prices have been falling faster than international ones, according to analysts at Macquarie Bank. ("Alumina: The rock looks susceptible to erosion"; June 8, 2015).

Indeed, as the title of that research note suggests, Macquarie is looking for China to drag down the international price, which has held remarkably steady in a $334-344-per tonne range so far this year, basis Platts' assessment of the free-on-board Australian price.

That says much about the lack of supply stress in the alumina market.

BAUXITE - LOWER PRICES, MORE SUPPLIERS

But what about the bauxite market?

Given China's historical dependence on shipments from Indonesia, the latter's ban on exports in January last year should surely have created some tension.

Apparently not.

Macquarie cites the evolution of the Clark & Marron CBIX index, which measures both domestic and international bauxite transactions into China.

The index did spike from $55 per tonne to $75 per tonne in the immediate aftermath of the Indonesian ban but it is now back at $58 per tonne, thanks in part to falling mining and freight costs.

And in part due to the emergence of new suppliers to Chinese alumina refineries.

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Graphic on China's bauxite imports:

http://link.reuters.com/wur84w

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Bauxite imports were running at above 4 million tonnes per month in both March and April, in essence returning to levels prevailing prior to the second half of 2013, when Chinese players accelerated purchases of Indonesian material ahead of the proposed ban.

Indonesia itself isn't supplying any bauxite at all to China. The ban on exports has killed off the domestic industry.

Into the breach have stepped both traditional suppliers such as Australia and India, and new producers such as Malaysia.

China's imports from Malaysia mushroomed from just 154,000 tonnes in 2013 to 3.3 million tonnes last year. The momentum is still building. Imports in the first four months of this year were 4.6 million tonnes.

Waiting in the wings are West African suppliers such as Ghana and Guinea, although import flows from both are still relatively small scale.

MISSING LINK

Missing from this raw materials picture is perhaps the most important component, namely China's own bauxite production.

The country's statistics agencies don't publish any production figures. It's far from certain whether any body at national or industry level actually attempts to collect the data.

Which is a shame since without this information it's tricky to say how sustainable are the country's reserves.

The perception is that they are limited and low-grade relative to other bauxite deposits in the rest of the world.

The current reality, though, seems to be that they are more than sufficient to allow local producers to keep building new alumina capacity at the rate they are. Particularly when that capacity is located far enough inland to make reliance on imports a financial non-starter.

Moreover, several Chinese players are working on new technology that could produce alumina not from traditional bauxite but from fly ash, a waste product generated by burning coal which can contain up to 45 percent alumina.

According to consultancy AZ China, a couple of operators, Datang and Mengxi Aluminium, both located in Inner Mongolia, have built fly ash-alumina plants, although costs are thought to be high.

However, as AZ China's Paul Adkins wrote in a blog last October, "one suspects that the key to developing successful technology for fly ash is runtime experience." ("Fly ash takes a step forward", Oct. 17, 2014)

Large-scale commercial production of alumina from fly ash may still be a future dream but the simple fact is that right now China does not seem to be experiencing any problem in sourcing sufficient bauxite, both domestic and imported, to keep its alumina refineries supplied. Even with the supply shock of last year's Indonesian ban.

And as long as that remains the case, the Chinese aluminium production boom will continue.

(Editing by David Evans)