Bauxite and Alumina
The global alumina market was fairly balanced at the end of 2013. Platts alumina spot prices started the year at USD 333 per metric ton and ranged from USD 310-350 per mt, ending the year at USD 333 per mt. Prices averaged USD 326 per mt for the year, increasing slightly from 2012. Average prices as a percentage of LME increased and represented 17.3 percent for the year compared with 15.6 percent in 2012. Spot prices at the end 2013 represented 18.5 percent of LME.
Chinese alumina imports amounted to 3.8 million mt, down 24 percent from 2012. Bauxite imports into China were high in 2013 in advance of announced restrictions on Indonesian exports that took effect beginning January 2014. For the year 2013, bauxite imports reached record levels amounting to roughly 72 million mt, an increase of 79 percent compared to 2012. Of this amount, approximately 49 million mt was sourced from Indonesia and 14 million mt from Australia.
Three-month LME aluminium prices were relatively weak throughout the year, averaging about USD 1,960 per mt in the first half of 2013 and falling to an average of roughly USD 1,820 per mt in the second half of 2013. Prices were volatile but with a downward trend for most of the year. The year ended with a price around USD 1,810 per mt.
Average North American and European standard ingot premiums increased by 12 percent and 13 percent respectively compared to 2012. Ingot premiums remained at record levels for the first half of 2013 before falling significantly in the third quarter, influenced by potential changes in LME warehousing rules. However, by the end of the year, ingot premiums strengthened in North America, ending at the highest level of the year and continued increasing into January 2014. In Europe, ingot premiums also improved significantly by the end of the year. The positive developments resulted from stronger demand in the physical markets combined with announced and expected closures and curtailments. Continued ownership of metal in warehouses by financial investors also influenced developments of ingot premiums.
Global demand for primary aluminium (excluding China) increased around 1 percent compared to 2012. Corresponding production declined slightly, mainly due to closures and curtailments. As a result, the market was slightly under-supplied in 2013. Demand for primary aluminium is expected to grow by about 2-4 percent in 2014 excluding China. Corresponding production is expected to grow at a somewhat lower rate.
Demand for primary metal in China increased around 10 percent to 23.9 million mt in 2013. The market was relatively balanced for the year and is expected to remain so in 2014 due to strong demand growth and closures and curtailments offsetting new capacity.
LME stocks were stable throughout the year amounting to 5.6 million mt at the end of 2013. Most of the metal in warehouses continues to be owned by financial investors. Total inventories, including unreported inventories, were estimated to be around 12.1 million mt at the end of 2013.
Demand for extrusion ingot and foundry alloys in Europe improved gradually during the year. Consumption of sheet ingot demonstrated positive developments during 2013 and ended the year on a higher level than in 2012. The market for wire rod performed weaker than expected in 2013 and remained on a level similar to 2012. Market demand for metal products in general is expected to strengthen somewhat in 2014.
Consumption of extrusion ingot and foundry alloys improved in the U.S. and was stable in Asia (excluding China) during 2013 and is expected to remain so in 2014. Further improvements are expected in the U.S.
The European market for flat rolled products increased by 2 percent in 2013. The automotive segment demonstrated the strongest growth during the year reflecting the growing substitution of steel by aluminium in the production process, in particular for exports of premium cars to China and the US. Demand in the building and construction segment remained on a low level but recovered somewhat compared to the previous year supported by mild winter weather conditions. Consumption in the beverage can market was flat with a relatively healthy development during the first half of the year offset by customer destocking activities in the second half. Foil consumption was stable. General engineering showed a solid growth as industrial activity increased. Demand in the European flat rolled products market is expected to increase further in 2014.
Demand for general extruded products improved slightly in North America compared to 2012 but declined in Europe. Market conditions for building systems continued to deteriorate, in southern Europe in particular. Demand for precision tubing increased somewhat.
Nordic electricity prices increased significantly compared to 2012 driven by a negative hydrological balance throughout the year. A delayed spring thaw led to low water reservoirs in April and corresponding high prices. This was followed by a dry summer which supported prices. Wet, mild weather conditions in December, however, pushed winter prices down and returned the hydrological balance to normal levels by the end of the year. These factors contributed to lower volatility in electricity prices throughout 2013.
In 2013, total power consumption in the Nordic market declined by 5 TWh to 380 TWh. Total power production declined by 22 TWh to 380 TWh. Power production in Norway reached 133 TWh. This was 12 TWh lower than 2012.
As a result of industry consolidation, relatively few companies are producing a substantial portion of primary metal on a global basis. Hydro 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. Following the merger of Dubai Aluminium and Emirates Aluminium in 2014, Hydro will be the sixth largest western producer.Fig. There are now four large operators in China, which are presently focusing on supplying the Chinese market and several important smaller producers that exhibit strong growth ambitions. However, access to sufficient bauxite resources appears to be a constraint.
Bauxite and alumina price developments
Bauxite and alumina prices have been strongly influenced by developments in China, which is heavily dependent on imported bauxite. Bauxite imports to China increased by 79 percent in 2013 as Chinese alumina producers continued to build inventories in anticipation of announced restrictions on Indonesian exports which became effective in January 2014. Imports amounted to almost 72 million mt of bauxite, about double the amount of actual requirements by importers.
China is facing supply challenges in the Pacific region and higher freight costs for bauxite sourced from the Atlantic region. In 2013, China sourced about 88 percent of its imported bauxite from Indonesia and Australia. The equivalent percentage for the years 2009 - 2011 was 98 percent. During 2013, the price of imported bauxite fluctuated based on the country of origin.
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 above 17 percent in 2013. 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).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.Fig.
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. Since then, prices have continued to be low averaging USD 2,050 per mt and USD 1,887 per mt for 2012 and 2013 respectively.
Prices have also been significantly influenced by developments in production capacity and inventories. 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 and a relatively long lead time to move metal out of certain LME warehouses has resulted in a tight physical market and historically high ingot premiums. We expect this situation to continue under the present economic conditions into first half of 2014 despite changes to LME warehousing rules aimed at increasing the supply of physical ingots. See section Financial and operating review - Market developments - Primary metal later in this report for more information on developments in ingot premiums.
World average production costs for 2013 were comparable with cost levels in 2007, just before the financial crisis. Energy and carbon cost have increased driven by strong demand for raw materials in emerging economies. However, these have been largely offset by lower LME-linked alumina prices and higher value added through casting operations. Compared to the previous year, world average production costs declined due to lower alumina, power and carbon costs. Stable cost developments combined with the significant fall in aluminium prices has led to an industry-wide weak financial performance for the past several years.
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.