Indonesia’s ban on the export of raw bauxite, used to make aluminium, and the auto industry opting to use the metal instead of steel is very good news for African producers such as Guinea, Ghana and Sierra Leone as the global price of aluminium continues to break records. Report by MJ Morgan.
Aluminium prices have been rising this year, outperforming even nickel. They reached an 18-month high in September on the London Metal Exchange. Starting the year at around $1,750/tonne, they rose to above $2,100/tonne at their peak, fell back to the $1,900/tonne mark and are now a little off $2,100/tonne.
One of the major factors driving up prices has been Indonesian bauxite supplies – or, more accurately, their lack. Indonesia is the source of about 15% of global bauxite but its supplies have been off the market as the government has banned exports of bauxite (the unrefined ore from which aluminium is made). The aim is to force local beneficiation (processing) of unrefined bauxite into alumina (aluminium oxide) that is then subsequently smelted into aluminium.
Whilst supply is down, demand is up. One major reason for this is the automobile sector substituting lighter aluminium for steel (even though the former is around three times more expensive than the later), in order to meet much more stringent emissions targets in the US and EU markets. Chinese demand has also been resilient.
This prices spike is good news for Africa’s bauxite exporters. West Africa is the source of 20% of the world’s seaborne bauxite, from Guinea, Ghana and Sierra Leone.
In fact, Guinea alone is the world’s second-biggest producer and is in a good position to benefit from rising demand from industry and the downward pressure on supply resulting from the absence of Indonesian supply. Fortunately, to date Ebola has had a limited impact on bauxite exports from Guinea (where there have been around 1,000 deaths from 2,000 cases to date), according to the International Aluminium Institute.
Anglo-African Minerals, which is planning the 2m tonne a year Kindia project (near to Rusal’s operation) in Mali, does not expect any delay as a result of Ebola. A feasibility plan will be completed in February and production is scheduled to commence mid-2016. Alufer Mining also has plans for the region. The company has just completed a feasibility study for its $350m Bel Air project in Guinea.
The world’s largest producer of aluminium, Russia’s United Company Rusal, sees world consumption reaching 66m tonnes in 2018. This represents a 27% increase on 2013’s 52m tonnes. Rusal’s shares rose 87% in 2014.
China weathered the lack of Indonesian supply by stockpiling last year. If Indonesian supplies do not come back online as planned next year, then prices may be driven even higher. As it stands, the country is the source of 50% of China’s bauxite imports.
As its stockpiles decline, China will be forced to start looking elsewhere. Guinea, home of 25-40% (estimates vary) of the world’s reserves, is well placed to benefit. But it will face stiff competition from Australia in particular and also from India and Malaysia.
Bauxite prices, at around $60/tonne, are the highest they have been since 2008. Because aluminium refining involves electrolysis, electricity makes up around half of production costs.
BHP Billiton has announced that its majority-owned smelter in Mozambique (which can produce 250,000 tonnes of aluminium per year) has achieved record production this year of 68,000 tonnes, for the 12 months from September 2013.
The Bayside smelter in South Africa, operated by BHP Billiton, produced 24,000 tonnes over the same period. The smelter is currently closed, due to high power costs – despite having a preferential arrangement with Eskom. Both Bayside and Mozal are rumoured to be up for sale. A long-running dispute over the Alscon aluminium plant in Nigeria saw the London Court of International Arbitration rule in favour of Rusal in its legal battle with four Nigerian state entities: the Bureau of Public Enterprises, the Federal Government of Nigeria, the Ministry of Finance, and the National Council for Privatisation.
The court supported the company’s claim that its purchase of the plant in 2006 was valid. The government has been trying to transfer ownership to BFI Group. Rusal initially asked for $500m in compensation for the money it had spent on the plant.
Citigroup has forecast a bauxite market deficit of 6.3m tonnes this year. The metals consultancy Natixis estimates aluminium prices will average $2,070/tonne in 2015.
Both Guinea, and West Africa more generally, are likely to find it difficult to fully capitalise on market conditions until Ebola is fully under control. Currently, anxieties are making certain shipping firms reluctant to sail to the region and are also driving up insurance costs.
China has signed an $11bn memorandum of understanding (MOU) with Mali. This includes $8bn for a 900km rail connection to Conakry and a $1.5bn upgrade to the line to Dakar, Senegal, the landlocked country’s principal port.
China Railway Engineering Corporation would be the primary contractor. The country wants to diversify from gold and has considerable resources in iron ore, uranium – and a lot of bauxite.
Exploiting this opportunity is going to require (i) China to deliver on the non-binding MOU; (ii) Ebola to be brought under control (it has not affected production much so far, aside from increasing insurance premiums and deterring some shipping companies); and (iii) the likely return of supplies next year from Indonesia and other projects – two in Australia – coming online and swamping the market.
Like many of the MOUs that China signs, this is nonbinding. It is expected that it will take at least a year to draw up the more-detailed framework that is necessary for arranging finance.
In line to benefit from the proposed infrastructure is Eurasian Natural Resources Corporation, owner of the mineral rights to Mali’s Faléa resource, estimated to hold 439m tonnes of bauxite. The company aims to produce 152m tonnes of alumina in Mali.
China’s CGCOC Group is investing in a steel and 400MW power plant as it seeks to tap the 100m tonnes of iron ore it owns at Bale, west of Bamako. The basin in which Bale sits is estimated to hold a total of 400m tonnes.
Kenya’s new Mining Bill
The legal landscape for extractive industries in Kenya is set to be completely reshaped by the passage of the Natural Resources Benefits Sharing Bill 2014, Energy Bill 2014, the Petroleum Bill 2014 and the new Mining Bill.
The new Bill, updating the Mining Act 1940, has been approved by the National Assembly but has not yet been considered by the Senate. The passage of the Bill is taking place during significant tensions between Kenya’s upper and lower legislatures, fuelled by the devolution issue.
Senate Majority Leader Kithure Kindiki has pointed to 46 bills that have been passed without Senate consideration (a matter that now seems set to go before the Supreme Court). Whether the Mining Bill will join them depends on if President Uhuru Kenyatta decides to assent to the Bill without allowing the Senate to consider it.
The Bill will see some of the Mining Minister’s current powers transferred to a nine-member Minerals Rights Board. These will include the issuing of licences, the setting of royalties and determining whether a mineral is ‘strategic’ (and this requires exceptional treatment).
Local communities are to receive 10% of mineral revenues, up from 5%. The counties will continue to receive 20%, and central government’s share will drop to 70% (down 5%). Companies will be obliged to list at least 20% of their equity on NSE within four years. It seems likely a state-owned National Mining Corporation will receive a 10% free stake in any projects.
The introduction of a commodity exchange in the oil-, titanium- and coal-rich nation is also under consideration.