Morgan Stanley "joining in the fun": Current aluminum oxide is in tight balance, any supply shock will lead to sharp price fluctuations

Since the beginning of this year, the price of aluminum oxide futures has been rising all the way. The main contract AO2407 has surged from 3000 yuan/ton at the beginning of the year to over 4000 yuan/ton, with a growth of over 30% in five months. The FOB price of Australian aluminum oxide has also continued to rise.

This is mainly due to the impact of tight supply. Domestic bauxite supply has been continuously interrupted this year, with a cumulative year-on-year production decline of 20% so far this year. Aluminum oxide production has been affected by the shortage of bauxite, and from a global perspective, aluminum oxide supply is also facing challenges.

Morgan Stanley pointed out in its report on Monday:

There is a 5.9 million ton aluminum oxide supply disruption globally, equivalent to about one-tenth of global supply after excluding China. As China needs to import more, the global aluminum oxide market is further constrained, leading to tighter aluminum oxide supply in China and globally, keeping aluminum oxide prices high for a longer period.

Morgan Stanley predicts that the current aluminum oxide is in a tight balance state, and the average annual price of aluminum oxide will exceed $360/ton in 2024. Any supply shock will cause sharp price fluctuations, and there is a risk of further price increases in the future.

Domestic Bauxite Supply Continues to be Interrupted, Global Aluminum Oxide Supply Faces Challenges

Morgan Stanley analysis points out that domestic bauxite supply has been continuously interrupted this year, leading to increased reliance on imports:

Due to factors such as environmental protection, mine safety control, and declining ore grades, domestic bauxite supply has been hindered, with a 20% year-on-year drop in bauxite supply as of 2024.

Considering the potential resumption of production in Shanxi and Henan mines, it is expected that the domestic bauxite production for the whole year will decrease by 8% year-on-year to about 60 million tons.

Due to the shortage of bauxite, aluminum oxide production has been affected. Morgan Stanley points out:

In the first four months of 2024, domestic aluminum oxide production only increased by 3% year-on-year. Aluminum oxide production has been affected by the lack of domestic bauxite, as inland aluminum oxide producers find it uneconomical to use imported bauxite due to high logistics costs. It is expected that with the restart of production capacity in Yunnan, aluminum oxide production will further increase.

With continuous domestic supply shortages, China is increasing its imports of aluminum oxide and bauxite:

In the first four months of 2024, bauxite imports increased by 6% year-on-year, with imports from Australia increasing by 20% and imports from Guinea increasing by 8%. Currently, 70% of China's bauxite demand relies on imports. 74% of which comes from Guinea, and 22% comes from Australia.

China has also imported more aluminum oxide, with imports increasing by 75% year-on-year since the beginning of the year. 76% of which comes from Australia, and 10% comes from Indonesia. However, due to global aluminum oxide supply challenges, China's aluminum oxide imports in April decreased compared to the previous month.

At the same time, the global alumina supply is also facing challenges:

Due to issues such as wars, difficulties in sourcing bauxite or natural gas, the global alumina supply is experiencing interruptions. As of now, approximately 5.9 million tons of global alumina supply have been interrupted, accounting for around 10% of global supply (excluding China). Considering that China needs to import more alumina, this will further restrict the global alumina market, leading to tighter supply in China and globally, and prices will remain high in the long term.

Alumina supply is in a tight balance

Overall, Morgan Stanley's bulk commodities team pointed out that the alumina market in 2024 will be in a tight balance, easily affected by any supply shocks.

On the supply side: Last week, Rio Tinto announced force majeure factors for alumina shipments from its Yarwun smelter in Australia and Queensland alumina refinery, citing shortages in natural gas inventories/supplies for power generation. This action by Rio Tinto highlights the fragility of supply-demand balance and disrupts expectations of a slight surplus in the alumina market.

On the demand side: With the restart of a smelter in Yunnan, it is expected that China's aluminum production will increase by 600,000 tons this year. Additionally, with improving profit margins, there are preliminary signs of restarts in Europe, thus demand for alumina will increase.

Regarding inventory, further analysis shows that there is limited buffer of alumina inventory in the market. If there is a competition for materials, the price of alumina may fluctuate sharply.

We believe this could keep alumina prices at historical highs and increase the likelihood of price spikes, with prices expected to exceed our estimate of an average of $360/ton for the 24 fiscal year, and there are also upside risks in forward-looking forecasts.

Looking ahead to the future global bauxite prices, the key lies in whether China's bauxite imports will continue to rise. This depends on two factors: 1) domestic bauxite supply and 2) domestic bauxite demand. Morgan Stanley pointed out:

For 1), short-term factors affecting bauxite production, such as mine safety and environmental inspections, seem to be becoming more frequent. In addition, iron ore grades will continue to decline, which means that China's demand for imported bauxite may increase as a proportion of total bauxite demand.

For 2), it is expected that China's alumina capacity and production will continue to increase until 2030, adding 8-9 million tons annually, and this development to some extent depends on the upper limit of China's aluminum smelting capacity. China is currently a net importer of alumina, importing about 1.8 million tons annually, and this year's aluminum production is expected to increase by 6 million tons, indicating further room for growth in alumina demand.