Braemar Weekly Dry Market Report

The Big Picture: West African bauxite

Changing dynamics for Capes

The seaborne bauxite trade has witnessed a dramatic shift in recent years, as Guinean mines ramp up exports and Capes take a greater share of cargoes. Guinea’s seasonal rainfall now presents a downside risk for freight rates in the second half of the year.

We look at the impact on the Cape market and examine prospects for this trade.

The volume of bauxite shipped on Capes totalled 40.7m tonnes from January-April this year, an increase of 11% YoY. The long-haul trade from Guinea-China represented 83% of these volumes, at 33.9m tonnes.

This has made bauxite an important source of Cape utilisation. While bauxite accounted for 6% of volumes shipped on Capes in April, it accounted for 12% of total Cape demand (measured in deadweight tonne days).

Amid lower iron ore volumes out of Brazil, which has been hit by weather-related supply disruptions and a slowdown in the Chinese steel sector, the balance of cargoes in the Atlantic has shifted firmly towards Guinea.

The second graph demonstrates how Guinea has increased its share of cargoes relative to Brazil, accounting for 36% of cargo loadings last month compared to 26% in April last year.

While the overall trend has shifted towards Guinea, there is a clear seasonal pullback during Guinea’s rainy season from around June to August/September. Last year, Guinea’s ratio of Cape loadings compared to Brazil went from 28% in May to less than 16% in August. Since 2019, Capesize bauxite volumes out of Guinea have declined by an average of 31% from the previous quarter in Q3, while drier weather in Brazil typically allows miners to increase exports during this period.

With Guinean bauxite now making up a greater share of shipments, there will be increased pressure on Brazilian iron ore to make up the shortfall in Q3.

Further expansions in West African capacity would help cement this shift in the dynamics of the Cape market. Several projects are in the works, including Alufer’s Labé mine and the Lelouma project being developed by Lindian Resources.

Indonesian export ban

Indonesia, the third largest exporter of bauxite last year, is introducing a ban on bauxite exports from June.

The ban has already increased demand for Guinea’s bauxite and reportedly accelerated the development of some projects. Indonesia exported 17.3m tonnes of bauxite on Capes in 2022, however, volumes have fallen off steeply ahead of the ban. With Australian bauxite exports falling by 9% from the previous year in April, Chinese smelters have clearly looked to Guinea to make up the shortfall, with positive implications for Cape demand.

Indonesian authorities hope the ban will encourage domestic processing and exports of higher valuable alumina and aluminium, as a similar ban did with nickel.

With production caps in China and the energy transition likely to fuel demand for aluminium, some Chinese smelters could move capacity to Indonesia to take advantage of a more relaxed regulatory environment, exporting alumina or aluminium back to China. The Indonesian government may also offer subsidised electricity and other incentives. In the long-term, this could remove some bauxite from the seaborne market.

Guinea’s authorities also have aspirations to move the country up the value chain.

Demand prospects

China’s aluminium sector faces several challenges that could limit further increases in bauxite imports.

According to estimates from International Aluminium, China’s primary aluminium production increased by 4% in 2022, to a new record of 40.4m tonnes, as new capacity came online. Production increased by a further 4.4% YoY in Q1 this year. In April, however, the rate of aluminium production growth slowed considerably to less than 0.1%, while China’s seaborne bauxite imports declined by 8% from March.

This reflects lingering power supply issues for smelters that have become increasingly reliant on renewable power. Since February, a drought in Yunnan has reduced hydro-power generation in the province, causing authorities to limit aluminium output.

Efforts to reduce emissions have also led to a national production cap of 45m tonnes per year and permits are required for any capacity expansions. As capacity nears the cap, these permits have become scarce, limiting prospects for future growth.

Despite this, a drawdown in aluminium stocks, which have declined by 47% since 9 March, suggests apparent aluminium consumption has remained strong.

January-April Chinese auto production was up 9% on last year, while exports set a record in April at 420k units. Electric vehicles requiring more aluminium, have seen the strongest growth, making up 32% of China’s new vehicle sales in April. China also plans to increase its solar capacity by 30% in 2023, with aluminium typically making up around 85% of solar panel components. The energy transition should continue to fuel demand for aluminium in the coming years.

These high levels of consumption and low stocks raise the possibility of a surge in bauxite imports from Guinea in Q4, as weather improves.