China's aluminium industry currently faces a significant bauxite tightness, impacting both the domestic and global markets. The recent recovery of hydropower output in the Yunnan province, which began in early May, offers a glimmer of hope for aluminium supply. This resurgence is expected to facilitate a greater resumption of the operational capacity of primary aluminium smelting plants. Despite this positive development, the increased operations in Yunnan are likely to put additional pressure on the already strained bauxite market.
Yunnan has been grappling with production restrictions for four consecutive years due to the insufficient hydropower output stemming from drought conditions. This province is crucial to the nation's aluminium production, accounting for 14% of China's total capacity. Its frequent production inconsistencies have made Yunnan a key element in both Chinese and global aluminium supply chains. The recent pattern of poor rainfall during the dry season, from November to April, has notably exacerbated this issue.
With rainfall returning to seasonal averages, Yunnan's hydropower output has seen a significant uptick, leading to a higher operational capacity for primary aluminium production. As of early May, the operational capability in Yunnan has exceeded 80%, a substantial increase from roughly 70% in March. Expectations are set for this capacity to surpass 90% by June. This revival of production in Yunnan is encouraging as it aligns with the ongoing global aluminium supply concerns and has stabilized prices in the market. Following a peak in aluminium prices in London during April's second half, the market has maintained relatively high levels, reflecting adjustments to the anticipated production resumption in Yunnan.
However, the situation is complicated by a potential bauxite shortage that could hinder the return of primary aluminium production in China and contribute to persistently elevated global aluminium prices. Official statistics indicate that from January to April this year, China's primary aluminium production surged to 14.24 million tonnes, marking a 7.10% year-on-year increase. This growth can largely be attributed to a major rise in alumina imports, which surged by 75% year-on-year to reach 1.06 million tonnes. Conversely, domestic alumina output remained almost stagnant during this period, with some production halted due to bauxite supply issues. On the other hand, domestic bauxite production saw a sharp decline of 20%, falling below 18 million tonnes. The resulting deficit is underscored by the fact that the year-on-year increase in imports only partially alleviated the shortfall, resulting in stockpiles descending to a near 28-month low.
As Yunnan approaches normal operational capacity in the coming weeks, a shortage of bauxite could emerge as the principal constraint for the aluminium sector in China. Domestic production within China is hindered by stringent environmental regulations and safety protocols for mining operations. Furthermore, the rainy season in Guinea, which extends from June to November, poses a seasonal challenge that may exacerbate the bauxite shortage. In the previous rainy season, bauxite exports from Guinea declined by 6.7% compared to the preceding six months, raising concerns about the availability of bauxite during the upcoming months. Although new projects may help mitigate this decline, expectations are still for a reduced capacity regarding exports.
The situation is compounded by a resurgence in demand from European smelters, which are recovering from an energy crisis during the past two years. Combined bauxite imports into the EU-27 and the UK reached 3.68 million tonnes in the year's opening four months, a substantial increase over the 2.39 million tonnes recorded during the same period last year, with imports from Guinea more than doubling.
Additionally, the bauxite supply in Guinea is vulnerable to the country’s political instability and unreliable infrastructure. Recent incidents have disrupted operations, potentially affecting future exports. Moreover, while Australia may increase production to meet some of China's increasing demands, it is unlikely that this will completely compensate for reduced outputs and seasonal declines from Guinea.
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