Bauxite is the main raw material used in the production of aluminium – the most abundant metallic element on earth – with 70% to 80% of raw bauxite ultimately processed into aluminium. While aluminium has numerous advantages, the current supply glut and energy-intensive nature of processing aluminium from bauxite have somewhat taken the shine off the industry in recent years. Additionally, given the efficient aluminium recycling industry and the fact that 75% of the material ever smelted is still in use, bauxite faces even further challenges. However, in spite of these challenges, output continues to increase, especially in China and Australia, the largest single producers of bauxite.
Significance in the Global Economy
Bauxite's primary use is the conversion into alumina and then into aluminium. The ratio of conversion is generally four tons of bauxite to produce two tons of alumina, which is then refined into one ton of the primary aluminium metal. Other uses for bauxite include abrasives materials applications, and use as a propping agent or "proppant" in drilling for oil and natural gas - the latter referred to as "fracking."
The use of fracking is likely to increase significantly as countries seek to exploit natural gas reserves. The US Energy Information Administration estimates that shale gas and tight gas consumption - both of which widely use fracking as a means of extraction - will grow from 11.2 trillion cubic feet in 2011 to 24.1 trillion cubic feet in 2040. While fracking methods have become more efficient since their inception nearly 70 years ago, the absolute increase in the drilling method will see an accompanying absolute increase in the use of bauxite.
As the holder of the largest exploited reserves of bauxite, developments in Australia's bauxite industry also have a significant impact on world bauxite supplies. While Australian bauxite is found at relatively shallow depths, most of it is relatively high in silica which necessitates extra refining, thereby raising costs.
In order to offset higher costs, Australian mining giant, BHP Billiton, ships bauxite for refining to one of two smelters that they own and operate in Richards Bay, South Africa - at the Bayside and Hillside refineries. The Hillside refinery has a capacity in excess of 700,000 tons per annum - the largest in the Southern hemisphere. However, power production issues in South Africa have seen the refinery come under pressure in recent years from the local electricity supplier.
Bauxite's main mining advantage is the relative ease with which it can be mined and its ubiquity; much of the bauxite in circulations comes from strip mining - which is a relatively low cost, albeit very environmentally unfriendly mining method. The major producers of bauxite, namely Australia and China, account for nearly half of the world's production while only accounting for just less than a quarter of the known reserves. China's bauxite production vis- à -vis its reserves is particularly notable; China's 2.96% share of the world's reserves have been translated into 18.25% of the world's production. While domestic bauxite has consistently trailed seaborne bauxite since 2006, the domestic industry has consistently increased year-on-year whereas bauxite imports have been relatively erratic and even contracted in alternative years.
Additionally, China's appetite for bauxite imports has skyrocketed significantly starting in 2006, when China became the second-largest importer of the material to the United States after seeing a 326% increase in bauxite ore imports over 2005. China saw another 151% increase in imports the following year, this time doubling the amount of bauxite the United States imported. China's appetite for bauxite needs to be understood in the context of its aluminium industry.
The Aluminium Drive
The near exclusive use of bauxite in the production of aluminium means that the latter industry has to be understood in order to thoroughly understand the bauxite industry. However, the usual supply-demand forces have a far less impact on the aluminium industry when compared to other resources. Currently, iron ore is experiencing a similar trend where supply far outweighs demand and a shift to equilibrium is taking longer than usual. A number of factors in recent years has seen the price drop, including an over-supply of aluminium, especially by the Chinese market. The increased expense of refining bauxite into aluminium, which has seen demand for the ore drop, compounds the oversupply state of affairs. Furthermore, the increased use of recycled aluminium instead of bauxite as a source of first production has further disrupted the traditional supply-demand relationship.
Ordinarily, supply-demand forces would see a shift towards equilibrium; however, the politics behind aluminium production in China have skewed this supply-demand relationship. Aluminium production is the lifeblood for a number of local Chinese authorities, and, up until recently, there was significant political pressure to maintain these industries driving China's massive aluminium output to supply a global market that does not currently need it.
However, at the end of July, Chinese Premier Li Keqiang pledged to limit overcapacity, ordering more than 1,400 companies operating across 19 industries - including aluminium production - to curb production. The fact that China has moved from producing less than 10% of the world's aluminium in 1999 to approximately 45% for the first half of 2013 means that Chinese policy is currently one of the largest factors affecting global aluminium supply.
Commodity Spotlight is produced by The Beijing Axis, a China-focused international advisory and procurement firm operating in four principal areas: Commodities, Capital, Procurement, and Strategy.
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