Growth in aluminium demand

China’s remarkable growth of approximately 9% real GDP per annum over the past decade, has fuelled an unprecedented demand for Australian commodities.

China dominates the global aluminium industry accounting for one third of world production and world consumption. Total primary aluminium output by China was 13.1 million tonnes in 2008. Dependence on bauxite imports will remain high. China’s strong domestic growth means increased consumption of aluminium which rose by 8% over 2008 and has forecasted growth of 4% for 2009. Significant growth in aluminium consumption is also taking place in India and other developing countries.

From 2008 to 2018, it is expected that the aluminium industry of China will grow by 12.5% as opposed to 7% growth for the rest of the world over the same time period.

Due to inadequate infrastructure as well as increasing economic and political instability and conflicts with the tragic loss of life in some bauxite producing countries (such as recently in the Republic of Guinea), customers are likely to turn to a stable country like Australia as a reliable source of supply.

Global alumina

Currently, alumina production worldwide is operating at close to full utilisation capacity, and therefore significant increases in capacity either by expanding the capacity of existing refineries (brownfields) or by building new refineries (greenfields) are expected.
Over the next ten to fifteen years, industry forecasts predict that there will be up to fifteen million tonnes of new alumina refining capacity made available through brownfield expansions. Such brownfield expansions will not be sufficient to meet world demand. Therefore, new greenfield projects are required to meet the growing world demand. Due to expansions of capacity of existing refineries and development of new refineries, opportunities to supply bauxite will increase significantly. Premium quality beneficiated bauxite products are preferred.

Return on assets

ABx is investing in bauxite exploration so as to identify a bauxite mining opportunity as its first priority. The following graph demonstrates the returns on assets for the various stages of the industry. Good returns on funds invested are achievable in mining provided that the deposit is in a favourable / low cost location. Even better returns are achievable in exploration, especially for discovery of premium quality bauxites.

Rising prices for metallurgical bauxite

Most metallurgical-grade bauxite and alumina are purchased under long-term contracts. Contract terms for these commodities normally are not made public.

The above graph shows (along with most commodities) a long term historical price decline of average quality bauxite in real terms and a recent reversal of this trend. It is also significant in that up until the end of 2005, the United States was the dominant driver of demand for internationally traded bauxite. Prior to 2000, the supply of bauxite from Jamaica to USA, and from the Republic of Guinea to USA was the main determinant of the prices reported by the USGS in the above graph. Most of these sales were transfer prices between mines and refineries owned by the same large aluminium companies. In 2003, China’s free-traded bauxite became a large contributor to the price figures in the graph. Prices for bauxite destined for the United States in recent times have ranged on a weighted average basis between US$25 to $US40 per tonne FOB, averaging around US$35 per tonne.

A similar price trend was also observed in iron ore, except that the rise started earlier and was sharper. When a country goes through industrial development, steel consumption rises first and a rise in consumption of aluminium follows after a few years.