Market situation

Energy

Nordic electricity prices were significantly lower in 2014 due to an improved hydrological balance compared to the previous year. Prices declined in the first half of 2014 influenced by mild, wet weather conditions and high power production. Prices improved in the third quarter due to low reservoir inflows, as a result of very dry summer weather conditions. In the final quarter of the year, prices were volatile, influenced by mild, wet weather conditions resulting in an improved hydrological balance at the end of the year.

Technical limitations on several transmission cables out of Southern Norway, combined with low nuclear production in Sweden and high reservoir inflows in the South, resulted in high area price differences in 2014, mainly in the second quarter of 2014.

In 2014, total power consumption in the Nordic market declined by another 5 TWh to 375 TWh. Total power production increased by 7 TWh to 387 TWh. Power production in Norway reached 142 TWh. This was 9 TWh higher than 2013.

The severe drought in Brazil has resulted in a deteriorating hydrological balance. Although the impact in the northern part of
the country has been lower, the power supply could be affected due to the integrated transmission system in Brazil.

Structural developments

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 became the fifth largest western producer. After the start up of the Maaden smelter in Saudi Arabia, there are no new greenfield smelter projects under implementation outside of China. There are now four large operators in China, which are presently focusing on supplying the Chinese market and several smaller producers that exhibit strong growth ambitions. Due to significant imports of bauxite in advance of the ban imposed by Indonesia, and new sources including Malaysia, China has sufficient supplies of bauxite for the 12-18 months. However, access to sufficient bauxite resources appears to be a constraint in the longer term.

Bauxite and alumina price developments

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 2014. The Platts alumina price index was introduced in 2010 and reflects the fundamental supply and demand balance of the alumina market. The index has gained support in the industry and currently represents the main reference for short and medium term contracts. Contract volume based on index prices is increasing and this trend is expected to continue.

Bauxite and alumina prices have been strongly influenced by developments in China, which is heavily dependent on imported bauxite. China’s bauxite imports declined 49 percent in 2014 following an increase of 79 percent in the previous year, influenced by an announced ban on imports from Indonesia which came into effect in January 2014. Following the ban, Australia has become the largest supplier of bauxite to China while Malaysia has emerged as a more significant source with monthly imports reaching an annualized rate of eight million mt by the end of the year. See Financial and operating performance section, Market developments, Bauxite and alumina later in this report for more information on alumina and bauxite imports into China.

During 2014, the price of bauxite imported to China fluctuated based on the country of origin but trended upwards. Average CIF China prices increased around 14 percent to USD 58 per mt in December from USD 51 in January. On a value-in-use basis (CBIX index), bauxite prices increased from USD 54 per mt to USD 67 per mt at the end of the year, indicating a higher cost of bauxite in the alumina production process.

While China is facing supply challenges from Indonesia in the Pacific region, freight costs for bauxite sourced from the Atlantic region declined by 25 - 30 percent compared to 2013. This could lead to more bauxite sourced from the Atlantic region going forward.

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 for primary aluminium including incentives to discourage the export of primary metal. At the same time, China has encouraged the export of higher value added fabricated and semi-fabricated products.

LME aluminium prices are heavily influenced by macro economic and market developments. During the financial crisis of 2008/2009, prices exhibited a 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, LME prices have continued to be relatively low averaging around USD 2,050 per mt for 2012 and around USD 1,900 per mt for 2013 and 2014 respectively.

LME prices have also been considerably influenced by developments in production capacity and inventories over the last several years. 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.

Premiums have become an increasingly important component of all-in metal prices and have risen significantly since the second half of 2013. Driven by tight physical markets and increasing demand, standard ingot premiums reached historically high levels in 2014. Product premiums have also increased due to stronger demand. Standard ingot premiums have declined somewhat since the end of 2014 e year and this is expected to impact value added premiums going forward.

Key factors underlying the tight physical markets are improved demand and the continued investments in metal in warehouses underpinned by the expectation of continued low interest rates and positive contango in the forward aluminium markets. A shortage of aluminium scrap in North America and Europe has also contributed to the premium developments together with higher logistical costs as more metal needs to travel into the main consuming regions.

Market conditions in China have not resulted in similar local premium developments. As a result, China has become increasingly competitive in terms of semi-finished products with increasing exports to major markets including Europe. See section Risk Factors later in this report for a discussion on our exposure to competition from China.

See section Financial and operating review - Market developments - Primary metal later in this report for more information on developments in ingot premiums.

Aluminium price developments

World average production costs (business operating costs) for 2014 have declined compared to cost levels in 2007, just before the financial crisis. Energy and carbon cost have increased compared with cost levels in 2007 driven by strong demand for raw materials in emerging economies. However, these cost increases have been offset mainly by lower alumina prices and in particular, higher value added through the casting process. Compared to the previous year, world average production costs excluding China declined, while Chinese production costs increased. Lower production costs in the world excluding China together with higher all-in metal prices has led to an improved financial performance industry-wide for the past year.


CBIX value in use index is a reference price for standard Gibbsitic bauxite. The index provides an indicative price of bauxite taking into consideration the quality of the material that impact the volume required to produce one mt of alumina.

Reported inventories include inventories at LME, IAI, SHFE and SRB registered warehouses, Japanese ports inventory plus inventories in unregistered warehouses in Wuxi, Nanhai, Shanghai, Hangzhou and Tianjin in China.

The all-in metal price refers to the LME aluminium price plus premiums.
 

  • Annual report 2014

  • Annual report 2014

  • Annual report 2014

  • Annual report 2014


Updated: September 12, 2016