Aluminium: Local manufacturing challenged by flood from China - Ravi Raghavan

The alumina industry has special significance for the chlor-alkali industry as it represents the single largest market for caustic soda. But the industry’s indirect impact on the chemical industry is even larger considering aluminium – the metal derived from alumina – is used to make chemical process equipment, amongst several other applications.

Manufacturing cycle

The aluminium manufacturing cycle starts with bauxite ore, which is refined to produce alumina – chemically an oxide of aluminium. About 2-2.5 tonnes of bauxite is typically needed to produce one tonne of alumina. The smelting of alumina – an electrolytic process that is highly power-intensive – results in the formation of pure aluminium metal. About 2 tonnes of alumina is typically needed to produce one tonne of metal.

The use of caustic soda is restricted to the first stage of alumina manufacture from bauxite, and this application accounts for both a significant chunk of the global caustic soda market as well as international trade. Often, it is the price determinant, especially for caustic soda lye.

An alternate route to aluminium involves the recycling of its articles. Nearly all of the ubiquitous aluminium cans used for packing beverages, for instance, are recycled back to base metal and reused. This too is an energy-intensive operation, but nowhere as much as the from its ore.

Way to go

At a fundamental level, demand for aluminium still has a long way to go, especially in emerging economies where per capita levels are much lower than in the developed world. Even in China, per capita aluminium consumption is just about 10-kg, compared to nearly three times that level in highly developed Switzerland. There is a clear linkage between aluminium consumption and GDP growth, and important drivers of demand include rapid urbanisation now underway in much of the developing world and the desire for lighter transport to save fuel. It is noteworthy to point out that in the first decade of this century, aluminium demand grew by close to 40% – only next to that of steel!

Industrial applications of aluminium include electrical power transmission, machinery & equipment, and construction. Aluminium, being an excellent conductor of electricity, is replacing copper for use in power transmission. Greater industrialisation, especially in developing economies, is expected to drive demand for all sorts of machinery, giving momentum to faster growth in demand for several base metals including aluminium. In housing, aluminium is a lightweight option to steel and wood for doors, windows and sidings. Tightening environmental standards is driving automobile manufacturers to substitute steel with aluminium in cars, which helps in reducing overall weight and so improve fuel efficiencies. In the packaging industry, a recent trend in India has been the gradual shift from packing beverages in glass bottles to aluminium cans.

Integrated play

One of the important levers of success in the aluminium business is integration – all the way to bauxite. The best refinery projects are almost always associated with bauxite reserves and this is getting to be more and more important given that the quality of bauxite reserves are diminishing and it is harder to get environmental approval for new mines. The quantity of bauxite traded internationally is diminishing and this trend could continue, putting stress on those aluminium manufacturers who do not have the linkages to the ore.

Bauxite is largely found in a narrow equatorial band between the Tropic of Cancer and Capricorn. The top five countries – Guinea, Australia, Brazil, Vietnam and Jamaica – hold over 70% of the world’s documented reserves, but of these only Australia, Brazil and Jamaica have realised their potential as bauxite mining or alumina producing nations. While still a major bauxite producer, sovereign risk has stunted development of the industry in Guinea to a fraction of its full potential. Strict nationalistic policies in Vietnam have resulted in the industry only just beginning to emerge. Indonesia also possesses significant bauxite holdings and has become a major exporter to China.

India ranks seventh in the global ranking of bauxite reserves – behind the top-five mentioned above and just behind Indonesia – with resources estimated at about 900-mt, about 3% of the global total. About 60% of all identified reserves are in Orissa and Andhra Pradesh along the east coast. Indeed, port access is as important for a bauxite resource as is long-term energy supply for aluminium smelting. Low energy costs is one reason even the barren Middle East is turning to be an efficient centre for metal production.

The flood from China

Though global demand for aluminium is growing and will require commensurate growth in primary smelter production, recycling and semi-fabricated aluminium products, the markets today face a situation of subsidized overcapacity which is undermining sustainable growth in the industry.

According to a document prepared by The Aluminium Association, a global body representing the large producers in the developed world, the world is now awash in excess capacity thanks to an investment binge in China. Aluminium primary smelting overcapacity in China, which was 10-mtpa in 2017, is expected to grow by another 30% in 2018, compared to 2017. This represents a capacity addition of 3.3-mtpa in just one year – an amount that is more than the entire production of the fourth largest aluminium producing country, Canada.

China today accounts for a total aluminium capacity of 49-mtpa – 54% of the world smelting capacity. From just 10% in 2000, Chinese manufacturers now supply 53% of the world’s primary aluminium and this has come about due an investment of between $120-bn to $150-bn since 2000. By 2020, China’s capacity will rise to a staggering 52-mtpa. Operating rates for all producers together there is only around 70%, compared to 88% in the rest of the world.

Pressure on prices

The supply overhang has had a predictable impact on aluminium prices. In FY16, prices fell 16% to about $1,592 per tonne, though they staged a small recovery in FY17, driven by the stimulus package unveiled by the Chinese government. Increased prospects of higher spending in the US market, after the last Presidential elections, also contributed to the uptick. A more recent factor driving up prices have been the tightening of environmental standards in China, which experts believe will force closure of small, inefficient units.

Indian producers – strengths negated by China

India’s three aluminium producers – Vedanta, Hindalco and Nalco – are primarily focussed on the local market, but do use exports as a flywheel to keep operating rates high. All of the smelters are located close to the respective alumina refineries and have linkages to bauxite resources. This has given India an attractive cost position, including in fabricated products where cheap labour also plays a significant role in determining operational costs. According to estimates made by CARE Ratings, a ratings agency, domestic producers will ramp up production of bauxite, alumina and aluminium to meet the growth in domestic demand, which it estimates at 3.5% annually during the next few years.

But cheap imports from China (and to some extent the Middle East) remain a concern for Indian aluminium producers (as for others elsewhere in the world). Local producers are also faced with higher costs on some of their inputs, notably power, and to some extent caustic soda. Consequent to this, their share of the domestic market has declined from 60% in FY11 to 47% in FY17.

Investments in caustic soda

To meet their caustic soda requirements, and to keep a handle on these costs, some alumina producers here are eyeing backward linkage to this raw material or augmenting already existing capacities. Nalco, for instance, is setting up a chlor-alkali unit in Dahej in a joint venture with Gujarat Alkalies and Chemicals Ltd., a leading caustic soda producer in the country. It is also reported to be eyeing another unit in the eastern part of India – possibly at Paradeep in Odisha – which could (if ethylene were available) be linked to production of polyvinyl choride and so gainfully utilise the chlorine that will be co-produced.

India’s aluminium producers have integrated, world-class operations, and are doing their bit to improve their cost and market position. But they, like producers elsewhere in the world, have to reckon with the big elephant in room, China!