Column: Electric dreams turn into a nightmare for battery metals
A sector that was once racing to build new supply has been closing mines and deferring projects as low prices bite into the cost curve.
(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
China is playing a crucial role in rebalancing the global aluminum supply chain in the wake of Russia’s invasion of Ukraine.
The country has lifted exports of alumina to Russia, compensating for the loss of raw materials feed after Australia banned exports in reaction to what the Kremlin terms its “special military operation”.
China has also stepped up exports of aluminum this year, particularly to Europe, where smelters are struggling with the power price surge resulting from reduced flows of Russian gas.
The country’s exports of semi-manufactured products are also accelerating, although this is unlikely to be seen as a welcome development by the West, which has long accused China of dumping aluminum in this form.
Russian aluminum hasn’t been targeted by Western sanctions but the country’s giant producer Rusal is facing ongoing disruption to its raw materials supply.
Australia placed a ban on exports of bauxite ore and intermediate product alumina to Russia in March, effectively freezing Rusal’s off-take from the Queensland Alumina joint venture.
The ban knocks out around 20% of Rusal’s alumina requirements for its Siberian smelters, the Australian government said at the time.
Rio Tinto has assumed full control of the refinery, a move being legally challenged by Rusal which further complicates any future resumption of alumina shipments.
China, meanwhile, is helping plug the gap.
China’s alumina exports to Russia were negligible in 2020 and 2021 at 1,258 tonnes and 1,747 tonnes respectively.
Shipments over the last four months, however, have boomed to 471,000 tonnes with June’s tally of 184,000 tonnes the highest monthly count yet.
The volume surge to Russia has been enough to tilt China back to a net exporter of alumina for the first time since 2018 and early 2019.
Then it was the Western market that was short of the raw material after a Brazilian court ordered the partial suspension of the Alunorte refinery, the world’s largest single production site with an annual capacity of 6.3 million tonnes.
Chinese exports filled the resulting supply gap then and are doing so again now for Russia.
War in Ukraine has also caused a tectonic shift in China’s trade in primary unwrought aluminum.
Europe’s power-hungry aluminum smelters have been curtailing production as reduced Russian gas supplies feed into a tightening energy crunch.
China has lifted exports in response, outbound shipments jumping to 177,000 tonnes in the first six months of 2022 from just 3,815 tonnes in the first half of last year.
First-half exports included 59,100 tonnes to the Netherlands, 32,900 tonnes to Turkey, 20,100 tonnes to Montenegro, 15,000 tonnes to the United States and 5,000 tonnes to Italy.
China, it’s worth remembering, hasn’t exported much aluminum in unwrought form over the last decade because of a 15% export duty.
Such is the shortage of metal elsewhere and so enticing the physical premiums that metal has started washing over that tax wall.
Equally significant, however, is the metal that has been diverted from China, which had been a massive net importer of unwrought aluminum since early 2020.
Imports slumped by 75% to 197,000 tonnes in January-June from 744,000 tonnes in the first half of 2021.
China was still a net importer in the first half of the year but a marginal one to the tune of 20,500 tonnes, compared with a net 740,000 tonnes this time last year.
The combination of China’s reduced call on metal and its direct exports indicates a massive shift in trade patterns between the east and west.
The pace of exports slowed noticeably in June itself and it remains to be seen how long this historically unusual phenomenon lasts.
China’s aluminum production is ramping up just as domestic demand cools, implying no shortage of units for potential future exports if the rest of the world needs the extra material.
Even if China does ship more unwrought aluminum in the coming months, the larger part of any domestic surplus will be transformed into semi-manufactured products.
Such “semis” are not liable for export duty but rather benefit from a VAT rebate, a tax structure that acts to channel aluminum down a value-add export path.
Semis exports surged by 18% to 5.5 million tonnes last year and have grown at a still faster 28% pace so far this year.
Much of the rest of the world views China’s semis exports as state-subsidized dumping and has countered with multiple tariff barriers.
More are being erected as China’s flow of semis into Western markets accelerates.
The European Union earlier this month said it would not prolong a nine-month suspension of anti-dumping duties on Chinese flat-rolled products, which are now liable to duties ranging from 14% to 25%.
The US Department of Commerce has also just self-initiated anti-circumvention inquiries involving imports of aluminum foil produced in China but finished in Thailand and South Korea.
Such is China’s dominance in the global supply chain and its export impact on product markets everywhere else.
It is of course that same dominance that has seen the country step into the supply breaches upstream in the alumina and unwrought metal segments of the processing chain.
Relief for the West’s raw material buyers, but more pain for product manufacturers.
(Editing by Kirsten Donovan)
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