The previous article in this series looked at a commodity which is essential for the global electricity and steel industries: coal. Today, We are looking at the bauxite/aluminium industry within Australia and around the world.
What is Aluminium?
Over the last 30 years, global aluminium consumption growth has outpaced all other metals (and not only because of the beers that miners consume at the wet mess after work). Global consumption of aluminium is forecast to grow by around 5% per annum through to 2030, driven by its increasing use throughout a wide range of industries such as automobiles, aeroplanes, packaging and electrical goods.
Aluminium is the most abundant metal in the earth's crust but it rarely exists in this free form. Bauxite is the natural mineral form of aluminium and is created by weathering of suitable rocks and soils. The colour and texture of bauxite is, therefore, similar to the natural ground it is located in, as shown in the photo below of the Huntley bauxite mine, Western Australia (WA).
Bauxite is possibly the easiest and cheapest of all commodities to mine. It is usually found within five metres from the ground surface and often requires no blasting with explosives. The topsoil is stripped and stockpiled before the bauxite ore is loaded into trucks for transport. The topsoil is then replaced and rehabilitation begins. This simple process eliminates many of the costly, time-consuming functions required on a typical mine site.
Bauxite is the start of the aluminium production chain. The bauxite is then sent to the refinery where it is turned into alumina, a white powder. The alumina is then smelted to produce the final product: aluminium.
Approximately 4 tonnes of bauxite are required to produce 2 tonnes of alumina, which in turn makes 1 tonne of aluminium metal.
Each step in the processing chain increases the value of the product significantly. In 2014, our producers received around $7,000 per thousand tonnes (kt) of bauxite, $280,000 per kt of alumina, and $1,750,000 per kt of aluminium.
The aluminium industry
Globally, Australia is the largest producer of bauxite and second largest producer of alumina but only a minor producer of the final product, aluminium, as highlighted in the graphs below.
There are several reasons why we are only a small producer of the final product. The Australian aluminium industry (particularly the energy-hungry smelting sector) has been affected by ageing assets, high labour and capital costs, rising energy costs, and a declining aluminium price which is interlinked with the rising Chinese domestic market.
The rise of the Chinese aluminium industry
Generally, the Australian resources industry has benefitted massively from the boom in Chinese demand over the past 10 years.
China is generally one of our largest customers for our commodities except for aluminium. The simple reason for this is that China has expanded its own aluminium industry massively over the past 10 years.
From an annual production rate of 7 million tonnes 10 years ago, China now produces more than 27 million tonnes, which is 50% of global aluminium production.
Because China was meeting its own aluminium demand the aluminium price did not recover from the global financial crisis like most other commodities. These days, China is often a net exporter of aluminium, depending on its own internal consumption demand, which puts further pressure on the metals price.
China's new aluminium smelting facilities are efficient, utilise new technology and are low cost. Producers in Australia and around the world have had to cut production due to the expanding Chinese industry.
Because of these reasons, the global aluminium business has not been very profitable after 2007. Just ask ex- Rio Tinto Limited's (ASX:RIO) CEO Tom Albanese, who was sacked in 2013 following Rio Tinto's 2007 takeover of aluminium producer Alcan which has been coined "the worst mining deal ever." So far, the assets have been written down to the tune of around $28 billion!
In the 2014 financial year, BHP Billiton Limited's (ASX: BHP) aluminium assets delivered underlying earnings of just $48 million from revenue of $3.3 billion – a margin of just 1%. It certainly is tough times.
The Australian aluminium industry
Alumina refining and, in particular, aluminium smelting are extremely energy-intensive processes. Two of the six aluminium smelters located in Australia were closed down in 2012 and 2014 respectively and the future outlook for the remaining four are bleak.
In contrast to the aluminium smelting sector, the alumina sector appears to be in slightly better health because our high-quality resource base gives Australia a competitive advantage. It does, however, face some of the same issues including old assets, rising energy costs and low prices. Rio Tinto recently shut its Gove refinery in the Northern Territory (NT) but at the same time is expanding the newer Yarwun refinery in Queensland (Qld). How long Australia's refineries remain globally competitive depends on many variable economic factors, but the older assets carry the highest risk of obsolescence.
Our bauxite resources are some of the most competitive in the world and the big miners are expecting to increase production in the future.
Major players
The Australian bauxite industry is dominated by only three companies: Rio Tinto Limited (ASX: RIO) and Alcoa Inc GDR (ASX: AAI) have similar market share whilst South32 Ltd (ASX: S32) operates the comparatively smaller Worsley Alumina assets.
Rio Tinto's bauxite mines are located at Gove, NT and Weipa, QLD. Alcoa and South32's bauxite mines are located near Boddington, 100km South of Perth, WA.
Alumina Limited (ASX: AWC) has a long and complicated history with Alcoa. The end result is that it owns 40% of an entity formed in 1995 and named Alcoa World Alumina and Chemicals (AWAC), the world's largest alumina producer which is operated by Alcoa. AWAC is the company that holds most of Alcoa's Australian assets and also has numerous international assets. Therefore, Alumina Limited effectively has a 40% interest in a large number of Alcoa's assets and will perform broadly in line with Alcoa.
The Australian aluminium industry produced approximately 1,500kt of aluminium, 20,000kt of alumina, and 80,000kt of bauxite in 2014. Approximate production rates for the three companies operating in Australia are shown below.
Major global companies involved in the aluminium industry, particularly alumina refining and aluminium smelting, include UC Rusal (Russia) and Chinalco (China).
Summary
The Australian aluminium industry is facing significant headwinds from rising costs and the expanding Chinese industry. The bauxite mining and alumina refining sectors are likely to operate for many years into the future. The same can't be said about the aluminium smelting sector, which is highly likely to suffer additional closures in the future.
Keep an eye out for the next article in which we'll be taking a closer look at an extensively used industrial metal: copper or Dr. Copper as it is sometimes known.
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