Market situation

aluminum rods

Bauxite and alumina

The alumina market was relatively strong in the beginning of 2011 with increased demand and production due to the ramp up of new primary aluminium capacity and start up of new alumina projects. The Platts alumina spot prices started the year at USD 372 per mt, reaching a peak in April/May, with prices over USD 400 per mt. Prices declined at the end of the year to USD 305 per mt. Spot prices ranged between 15 and 17 percent of the LME price during 2011.

During 2011, China continued to increase its domestic alumina production from around 29 million mt in 2010 to 34 million mt in 2011. Imports of alumina fell from 4.2 million mt in 2010 to 1.9 million mt in 2011. China imported more than 45 percent of its requirements for domestic alumina production. Bauxite imports into China increased from 30 million mt in 2010 to 45 million mt in 2011. Annualized bauxite imports into China in November 2011 reached a record level of 54 million mt. 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.

Primary aluminium

Three-month LME aluminium prices were relatively strong in the first half of the year, averaging about USD 2,570 per mt compared with an average of USD 2,270 per mt in the second half of 2011. Prices were volatile, reaching a peak above USD 2,700 per mt in early May, and ending the year around USD 2,000 per mt.

Global demand for primary aluminium (excluding China) increased compared to 2010. Corresponding production also increased, mainly due to new greenfield smelters in the Middle East and Asia. Annualized production was relatively stable in the final quarter of 2011, amounting to 26.6 million mt. Annualized consumption declined, however, amounting to 24.7 million mt. Recent announcements of smelter closures and limited new capacity coming on stream are expected to improve the supply demand balance in 2012. Demand for primary aluminium is expected to grow by about 3-5 percent in 2012. However, market sentiment continues to be influenced by significant economic uncertainty.

Demand in China increased around 15 percent in 2011, from 16.8 million mt in 2010 to 19.3 million mt in 2011. The market for primary metal was largely balanced in China throughout 2011, and we expect this to continue in 2012. LME stocks increased gradually from 4.3 million mt at the end of 2010 to around 5 million mt at the end of 2011. The majority of the metal in warehouses continues to be owned by financial investors. Global inventories, including unreported inventories, were estimated to be around 12 million mt at the end of 2011.

Demand for most metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) in Europe weakened during the year. North American demand was stronger in general. Demand for foundry alloys continued to be strong in Northern Europe and in Germany in particular, and also improved in Asia.


Rolled products

European demand for flat rolled products was somewhat higher compared to 2010, as most markets improved in the first half of 2011. However, demand weakened in the second half of 2011, impacted by customer destocking and weak markets in general as a result of increasing economic uncertainty in Europe, and in Southern Europe in particular. Chinese exports into Europe fell during the second half of 2011 as a result of the weaker markets.

Developments varied across the different market sectors. Demand within the automotive segment demonstrated a strong growth influenced by the robust demand for premium cars in China and the ongoing substitution of steel by aluminium in the manufacturing process. The building and construction segment remained weak during the year while demand for foil applications declined. Demand for the beverage can segment was strong throughout 2011. Demand for general engineering applications declined significantly, driven by destocking activities at distributors and end-users and somewhat weaker industrial demand, resulting in pressure on margins for this market segment towards the end of the year. Economic and market developments for 2012 are uncertain with low visibility. However, certain leading indicators are positive.

Extruded products

In Europe, demand for extruded aluminium products increased slightly compared to last year. Demand was higher for most market segments in Northern Europe, but somewhat lower in Southern Europe. In North America, demand fell compared to 2010. However, shipments from domestic extruders increased due to the implementation of anti-dumping duties on Chinese exports. Growth in South American extrusion demand slowed compared to 2010, but continued to be positive, particularly in Argentina. Demand in the automotive market improved during the year for all geographical regions except Europe, supported by strong economic growth and robust demand from emerging markets. European demand for extruded aluminium products is expected to decline in 2012, with the building and construction market continuing as the weakest end use market segment. Outside of Europe, the market outlook is positive, within the automotive and transport segments in particular.


Nordic electricity spot prices started the year at very high levels, driven by a significant hydrological deficit of almost 40 TWh. However, high imports, high thermal power production and high precipitation resulted in a more normal hydrological balance by the autumn, putting downward pressure on spot prices. By the end of 2011, water reservoirs in Norway were 80 percent of full capacity, which is 11 percentage points above normal and the highest level experienced since 1990. In 2011, the total power consumption in the Nordic market decreased by 19 TWh to 379 TWh, mainly due to milder weather. Total power production decreased by 4 TWh to 375 TWh. Power production in Norway amounted to 128 TWh, which is 4 TWh higher than 2010.


Structural developments

As a result of industry consolidation, relatively few companies are producing a substantial portion of primary metal on a global basis. Hydro, the fifth largest producer, has increased its capacity by nearly 50 percent in 2011, with the ramp up of Qatalum in Qatar and the integration of the Albras smelter in Brazil. Several important smaller producers in emerging markets exhibit strong growth ambitions. However, access to sufficient bauxite resources appears to be a constraint. There are also several new operators in China, which are presently focusing on supplying the Chinese market. Most companies appear to be targeting integration into both energy and bauxite, while the focus on downstream integration has been lower. As a result, the downstream aluminium industry has evolved significantly, with consolidation as well as spin-offs from large integrated aluminium companies.

Today, there are only two major global integrated aluminium companies - Alcoa and Hydro - but both have also restructured their downstream portfolios significantly during the last several years. Restructuring is expected to continue as the major metals and mining companies reduce their exposure to downstream operations and streamline their metal portfolios, targeting specific markets to increase the scale of their core operations. These developments have led to the opportunity for Hydro to acquire the aluminium operations of Vale. New capacity is also expected to be developed in emerging, fast-growing markets.

Bauxite and alumina price developments

Bauxite and alumina prices have been strongly influenced by developments in China, which is heavily dependent on imported bauxite. In 2011, China imported roughly 43 million mt of bauxite, representing roughly 45 percent of its bauxite requirements and the quality of Chinese domestic bauxite is deteriorating. However, China has recently started to mine underground bauxite deposits in order to maximize its use of domestic resources. Alumina prices, as a percentage of LME, have been increasing. Since 1990, contract prices have risen from a level of around 12 percent of LME reference prices to around 15-16 percent in 2011. This reflects a general trend where the owners of natural resources are taking an increasing share of profits. This trend is expected to continue. There has also been a shift in the alumina market towards shorter contract durations. Cost developments Similar to aluminium, the alumina cost curve has shifted upwards in the last five years, increasing roughly USD 60 per mt mainly driven by cost increases in bauxite and fuel.

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.

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 remained volatile but improved continuously throughout 2010 and into the first half of 2011, before falling to around USD 2000 per mt at the end of the year. In addition, as a result of trading by financial investors in the derivative markets, price volatility has been high during the past several years and may continue. 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 has resulted in a tight physical market and historically high ingot premiums, although premiums have declined recently.

Cost developments

In the last five years, the aluminium industry cost curve has increased on average about USD 300 per metric ton, mainly due to higher input costs driven by strong demand for raw materials in emerging economies and in China in particular. More than half of the increase is related to power with the remainder reflecting higher costs for carbon and alumina. The upward trend paused temporarily in 2009 as commodity prices in general fell. However, costs increased in 2010, and there has been a further increase in cost pressure during 2011. In the future, primary aluminium production is expected to be developed in energy-rich areas where power prices are more competitive than in developed energy markets such as Europe and the U.S. Such countries and regions are expected to include the Middle East, India, Iceland and some countries in Africa, Asia and South America. China will also continue to be an important producer and consumer of primary metal.

Similar to aluminium, the alumina cost curve has shifted upwards in the last five years, increasing roughly USD 60 per mt mainly driven by cost increases in bauxite and fuel.

Updated: October 11, 2016