In recent times, a notable trend has emerged within the commodity market where most commodities are experiencing a decline; however, one unique player stands out—aluminaIts recent performance has remained notably resilient amidst this downward spiral, making it a subject of interest for investors and analysts alikeSuch contrarian movements always warrant close attention, as they can signal underlying market dynamics that deviate from the broader trends.

Starting from December of last year, after witnessing three significant upticks, alumina has showcased a remarkably strong price trajectoryPresently, profits from this commodity are hitting remarkable levels, exceeding 1000 yuan per ton, indicating robust market dynamics at play that defy overall bearish sentiments.

Contrastingly, the downstream market for aluminum metal, which relies heavily on alumina, has not mirrored this optimism

Following a brief resurgence in February, the price of aluminum has retreated to levels akin to where it started, raising questions about the sustainability of demand within the aluminum sector.

This provides a perplexing scenario: approximately 95% of the world’s alumina production capacity is destined for aluminum smelting, and thus, the divergence in price trends between alumina and aluminum has sparked discussions around supply-demand fundamentals that are seemingly disconnected.

The path of alumina's price escalation traces back several years, with its initial surge stemming from political upheaval in GuineaIn 2021, following a coup led by Mamady Doumbouya that resulted in the establishment of a transitional government, alumina prices began their first significant rise

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This geopolitical event not only disrupted local supply chains but also had ripple effects on global markets.

However, after a period of relative stability, prices began their descentThe situation in Guinea took another turn in December last year with a catastrophic explosion at a fuel storage facility in Conakry, which inevitably impacted the transportation of bauxite, the raw material for alumina production.

This incident disrupted mining operations and was compounded by impending nationwide strikes called by unions starting February 26, 2024, prompting further challenges in bauxite production and exportationSuch interruptions can drive prices up, but they also raise concerns about long-term sustainability.

As the year progressed, additional challenges emerged in Australia when two alumina refineries owned by Rio Tinto in Yarwun and Queensland faced reduced operational capacities—around 1.2 million tons annually—following natural gas pipeline fires, indicating how external factors can severely curtail production outputs.

On May 21, Rio Tinto declared a force majeure on alumina shipments from its Australian operations, citing natural gas supply shortages

Initial forecasts estimated production recovery by June; however, local gas supply issues have pushed expectations to SeptemberSimilarly, Alcoa shut down its Kwinana alumina plant in Australia in April, further reducing global alumina output.

By June, the profit margins from alumina exports opened up significantly, shifting trade flows and converting China from a net importer of alumina from February to April into a net exporter during June and July, showcasing the impact of shifting market dynamics.

Domestic issues exacerbated the situation as major alumina-producing regions like Henan and Shanxi faced widespread production halts prompted by environmental safety inspections, leading to a decline in bauxite quality as well

By July, cumulative bauxite production in China had reached approximately 32.81 million tons, marking a 17.43% year-over-year drop, highlighting the tightening supply constraints.

Throughout this year, domestic demand for electrolytic aluminum has remained robust, with a production output of 28.91 million tons from January to August, showcasing a 5.1% year-on-year increaseSuch demand stems partly from the transition to renewable energy, which is propping up the aluminum sector despite challenges in other traditional sectors.

Despite anticipated declines in architectural aluminum production as the real estate market falters, sectors within the renewable energy industry are utilizing aluminum at an increasing rate, such as solar panel frames, battery packs, and crash beams

This shift is poised to bolster industrial aluminum output, even as construction-related production wanesForecasts suggest a potential 6.9% increase in industrial aluminum profiles production to 11.49 million tons in 2024.

Overall, the current dynamics for alumina are increasingly clear: a combination of weak supply and strong demand has led to a noticeable decline in inventories, signifying a robust bullish trend.

Nevertheless, it’s crucial to be cautious; high profit margins will transform bullish positions into bearish ones eventuallyLooking at the long term, the fundamentals surrounding alumina are largely accommodating.

Although the domestic alumina supply remains relatively weak, short-term boosts are only expected from enterprises like Inner Mongolia's Zhixuan, with a mere 500,000 tons of capacity awaiting enhancement

New supply additions are not anticipated until mid-November with the commencement of an additional 2 million tons from the Guangxi Aluminum projectThe global release of capacity remains a critical factor in determining alumina supply dynamics.

Looking globally, projects led by entities such as Tianshan Aluminum, Dynamic Mining, and AMC are set to commence operations, potentially contributing an anticipated 24.4 million tons to Guinea's bauxite production for 2024, with overall output hitting 142.63 million tons.

In the long run, projects such as those by Kaibo Energy and Suilex are slated for completion by the end of 2024, with further expansions anticipated in CBG's phases two and three, alongside the startup of Tebian Electric's alumina mining project, which should push production projections even higher

According to Minsheng Securities, Guinea's bauxite output is estimated to reach 143-196 million tons from 2024 to 2026.

Thus, alumina's fluctuating landscape is primarily influenced by forces on either the supply or demand side.

As previously mentioned, Guinea's production capacities in conjunction with domestic capabilities are gradually being released, signifying an overall easing trend in bauxite supply, with the demand environment being the critical factor to monitor moving forward.

On the surface, the demand feels optimistic due to the ongoing growth in aluminum output this year; however, the stagnant prices of aluminum in Shanghai signal underlying concerns that cannot be ignored.

In the near future, two significant challenges on the demand side are expected:

1) Recession expectations: Even though the United States maintains assertions regarding a soft landing, such an outcome remains complex

The forthcoming months will be critical as high-interest rates begin to manifest their impact, potentially accelerating economic downturns beyond market anticipations.

2) Exports: The quick surge in aluminum product exports this year has compensated for traditional sector consumption deficits, yet ongoing weaknesses in the real estate market continue to suppress raw aluminum demandMoreover, evolving policies worldwide could affect the sustainability of this export trend, posing significant challenges for maintaining the current growth trajectory.

In conclusion

The continuous surge in alumina prices this year can be attributed to restricted production capacities both domestically and internationally, stemming from strikes in Guinea and shutdowns in Australian alumina refineries

However, the core driver remains the substantial reduction in domestic bauxite output due to environmental regulations, resulting in a capacity contraction of approximately 17%.

Concurrently, domestic demand for aluminum continues to hold strong, particularly due to demand shifts towards renewable energy, thereby sustaining high utilization rates across the industryThe first eight months of the year have seen a 5.1% increase in electrolytic aluminum production.

At present, the alumina sector is navigating through a phase characterized by high profitability; however, market projections suggest a looming overcapacity issue could jeopardize future stability

With alumina production capacities exceeding 100 million tons versus an actual production of just over 80 million tons, the situation depicts a clear overcapacity scenarioCoupled with electrolytic aluminum’s capped production ceiling, the correlation between increasing alumina production and stagnant processing capacity creates a precarious dynamic.

Looking ahead, easing production constraints are anticipated, yet consistent demand remains a pressing concernWith the upcoming National Day holiday approaching, seasonal stocking and pre-New Year replenishment trends could potentially reignite bullish tendencies in the marketHowever, the ongoing high profitability accompanied by high production rates may lead to a heightened risk of supply pullbacks due to maintenance shutdowns.

The dynamics of alumina evoke memories of the soda ash market, wherein both industries exhibit a notably concentrated supply chain