Industry - FAQ

Q: What are the industry’s primary production cost drivers?

A: There are two predominate cost drivers through the mining, refining and smelting phases of aluminum production: electricity in the smelting phase and bauxite supply (including transportation, handling and waste disposal) in the refining stage. Bauxite mining typically is low-cost surface mining with little or no overburden. Other energy costs to fuel calciners and steam production in the refining stage also play significant roles.

Guinea Alumina has several advantages. One is its very low cost of around $12 per metric ton of alumina produced versus up to $120 per metric ton for some of the older North American and European refineries remote from their source of bauxite. The figures for some of the refineries in China, which do not have their own indigenous bauxite, can be even higher., In addition, since Guinea Alumina exclusively supplies alumina to aluminum smelters which price alumina as a percentage of the price of aluminum it should reap the benefit of the higher revenues of this phase of production while maintaining a low cost structure despite structurally higher energy (electricity) costs.

Q: What are the primary drivers for market growth?

A: As a strong, lightweight and versatile material, aluminum has applications across many sectors of developed economies, including transportation, construction, food and beverage packaging, and its penetration has been increasing due to its relative cost and environmental (fuel economy and recycle-ability) advantages. Market growth for alumina is typically tracked by reference to levels of primary aluminium production. Approximately 1.95 metric tons of alumina is required to produce one metric ton of primary aluminium. Annual smelter grade alumina consumption of 75 million metric tons in 2007 reflected a ten-year average annual growth rate of over 6% per annum. Historically, world alumina supply and demand had been balanced, with annual production capacity of aluminium and alumina now totalling approximately 38 million metric tons and 75 million metric tons (metallurgical grade), respectively. Due to the vertically integrated nature of the major aluminium companies, this supply and demand balance has been achieved more by companies adjusting alumina production to meet demand than by external supply and demand forces.

Q: Who are Guinea Alumina’s major alumina-supply competitors?

A: The major developments in the aluminium industry over the last couple of years have been (i) the consolidation of industry participants through acquisitions and mergers and (ii) the rise of alumina production in China. The aluminium industry has been consolidating in recent years and is now highly concentrated due to the high costs of entry. In 2007, Russian Aluminium Company, SUAL Group and Glencore merged their aluminium and alumina businesses into United Company RUSAL ("UCR"). Rio Tinto Limited acquired Alcan Inc. (together "Rio Tinto Alcan") and merged it with their own assets which included Comalco Limited. According to published figures, Alcoa Inc. ("Alcoa"), Aluminium Corporation of China Limited ("Chalco"), Rio Tinto Alcan, UCR and BHP Billiton accounted for or controlled close to 60% of the almost 78 million metric tons of alumina that was produced world-wide in 2008. The market for smelter grade alumina is primarily controlled by integrated aluminium companies. In 2008, worldwide alumina refining capacity totaled approximately 90 million metric tons per year including non-metallurgical aluminiums. It is estimated that approximately 80% of alumina production from alumina refineries is transferred to, and consumed by, smelters owned by the same entities that own the applicable alumina refineries. The "third party" market for alumina amounts to only a third of total production although that percentage will rise as new smelter companies enter the market. Alcoa is probably the world's largest supplier of alumina to third parties but Chalco, BHP Billiton and Rio Tinto Alcan are also major third party market sellers. Glencore was a major third party seller and is expected to continue trading alumina but its production assets have now been transferred into UCR, which has become a small net supplier as a result. The primary buyers of alumina are independent smelters and integrated aluminium companies that have smelting capacity that requires alumina in excess of alumina produced by their own alumina refineries. There has been a recent increase in the number and size of independent smelters in China and the Middle East. Despite this, Chalco has used the opportunity of recent low income streams for smelters in China to acquire a number of independent companies and to begin rationalizing the industry in that country.

Q: How does the recent industry consolidation impact Global Alumina?

A: Though the recent consolidation reduced the field of potential industry partners and extended the duration of Global Alumina’s competitive bidding process, industry consolidation should have a very positive, long-term effect on Global Alumina’s profitability and growth prospects because highly concentrated industries generally exhibit greater control over market supply and pricing. As a minority, independent supplier to the market positioned as it is on top of the prime developable resource with premier partners, Global Alumina should reap the benefits of both.

Q: What is the threat of competing materials forcing a decline in the aluminum/alumina markets?

A: Though modern science continually discovers and develops new materials and/or new applications for existing materials, there is nothing on the horizon that would have a material impact in the indefinite future on the anticipated growth in aluminum demand. Though there is a lot of talk about composite materials increasing their share of the aviation market this is a small, specialist part of the aluminum market. By far the largest share of the transportation market is taken up by motor vehicles and here the amount of the metal in each vehicle is rising as well as the overall numbers of vehicles produced Worldwide.