The alumina price had climbed to $351/t in the last month of 2016, the highest for almost two years, driven by China. In fact, the buoyant price caused Chinese alumina output to surge in Oct and Nov such that China was long alumina by almost 150kt in November, a highly unusual occurrence.

China appears to be experiencing regional tightness, rather than an overall alumina shortfall, with transport constraints restricting alumina deliveries from Shanxi refineries in particular. In addition, demand has been abnormally high as wary smelters are stocking up with alumina heading into winter when transport difficulties might worsen. And the tightness has allowed refineries to pass on cost increases from higher coal prices.

But the aluminum price is insufficient to support the alumina price. We estimate the high costs for coal and alumina may have raised the costs of an average Chinese smelter to around Rmb15,500/t, if it is fully exposed to market prices for inputs, from Rmb12,000/t a year ago when smelters were curtailing on losses. With the aluminum price subsiding towards Rmb12,700/t in Dec, from Nov highs, smelters may face losing Rmb3,000/t.

A similarly high alumina price began to unwind in Jan-15 despite a sizable China alumina deficit at that time, probably because smelters were in a mid-winter destock, not buying. We expect similar smelter destocking this Jan and Feb which may allow the price to ease.