The recovery of hydropower output in Yunnan since early May is a promising development for both China and global aluminium supply as it could enable further resumption of operating capacity. However, the increased operating capacity of primary aluminium smelting in China will intensify the pressure on the already constrained bauxite market.
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It is the fourth consecutive year that Yunnan's aluminium producers have faced production curbs due to insufficient hydropower output caused by droughts. The province holds the fourth-largest primary aluminium capacity in China, accounting for 14% of the country&#;s total. Compared to other regions, the unreliability of production in Yunnan has made it a critical variable in both China's and global aluminium supply. Poor rainfall during its dry season (November to April) in recent years has been the main source of this unreliability.
With rainfall finally returning to seasonal norms in Yunnan since the beginning of May, hydropower output has significantly increased, enabling more primary aluminium production to come back online. As of early May, the operating capacity of primary aluminium smelting in Yunnan had surpassed 80%, up from approximately 70% in March, and is expected to exceed the industry standard of 90% by June.
The recovery of production in Yunnan is good news for recent global aluminium supply tightness and has helped to stabilise prices. The recent peak in London aluminium price occurred in the second half of April, and the price stabilised at high levels since then, reflecting an earlier adjustment to production resumption expectations in Yunnan.
However, the bad news is that potential bauxite shortages could curb the resumption of primary aluminium production in China and add fuel to currently elevated global aluminium prices.
Official data show that from January to April this year, China&#;s primary aluminium output reached 14.24 Mt, marking a 7.10% y/y jump. This growth is primarily attributed to an unsustainable surge in imports of alumina (+75% y/y to 1.06 Mt), the product between bauxite and metal in the primary aluminium production chain. On the other hand, industry data show that the domestic alumina output was almost flat in the first four months of this year, with some capacity idled due to bauxite supply constraints. During the same period, domestic bauxite production plunged by 20% to below 18 Mt. The bauxite supply deficit is evident, as the year-on-year increase of 2.54 Mt in imports from January to April is insufficient to bridge the gap, resulting in stockpiles falling to a near 28-month low.
As the operating capacity of primary aluminium production in Yunnan approaches normal levels in the coming weeks, a shortage of bauxite could emerge as the primary constraint for China&#;s aluminium industry. With domestic Chinese bauxite production constrained by stringent environmental and mining safety regulations, the seasonal slowdown in Guinean exports during the rainy season (June to November) is likely to exacerbate the shortage. During the previous rainy season from June to November , bauxite departures from Guinea decreased by 6.70% (3.96 Mt) against the preceding six months. Although the commencement of new projects might mitigate this decline in the upcoming rainy season, a modest reduction in export availability remains likely.
Meanwhile, European smelters are recovering from the energy crisis over the past two years, leading to increased demand for Guinean bauxite in . In the first four months of this year, combined EU-27/UK bauxite imports reached 3.68 Mt, up from 2.39 Mt in the same period last year. Specifically, arrivals from Guinea more than doubled to 2.47 M from January to April. This trend is exacerbating the seller&#;s market in global bauxite supplies, adding to pressure on Chinese buyers.
Combined EU-27/UK bauxite imports improved in recent months (Mt)
Source: Kpler
In addition, bauxite supply in Guinea remains vulnerable to the country&#;s political and social instability as well as infrastructure unreliability. In mid-December, a blast at the primary depot of Guinea's state oil company in the capital resulted in a nationwide fuel shortage and temporarily affected some bauxite mining and transportation activities. Earlier this month, installations of the Simandou iron ore project were attacked by local communities. As December elections in Guinea approach, the potential for further incidents increases. Disruption to Guinean production could exacerbate the tightness of bauxite supply in China and potentially affect global aluminium production, even if these impacts are short-term.
Although Australia is well-positioned to ramp up production to satisfy part of increasing Chinese demand, aided by favourable weather in north Queensland and the Northern Territory during the ongoing dry season (May to October), it is improbable that this will entirely compensate for the supply losses from reduced Chinese output and the seasonal softness in Guinean shipments.. Around 98% of Australian bauxite exports are typically destined for China. Preliminary Kpler data show that Australian bauxite shipments may hit a multi-month, if not multi-year, high in May.
Australian bauxite exports are set to surge in May (Mt)
Source: Kpler
Alcoa&#;s decision to close its Kwinana alumina refinery in Western Australia in the third quarter of this year means domestic demand for bauxite will decrease, potentially opening the door for increased exports to China. However, exporting bauxite from the Huntly mine (with a nameplate capacity of 23Mtpy), which supplies the Kwinana refinery, is not straightforward. The world's second-largest bauxite mine has struggled with declining grades and permitting delays in recent years. The environmental regulator has been carrying out an unprecedented two-year rigorous assessment of Huntly's bauxite operations since last year, which could lead to future suspensions. Kpler data shows that Huntly exported only small amounts of bauxite to China between and , ranging from 0.2 to 0.5 Mt per year, likely due to a surplus at the Kwinana refinery.
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