Industry Overview

The market for alumina and aluminum have dramatic growth potential as a result of both significantly increased demand and political and environmental factors affecting supply. Global Alumina is perfectly positioned to capture the demand of independent aluminum producers as it builds the first green-field refinery to be constructed in Guinea in more than 40 years.

Introduction
Historical Perspective
The Market Today
Overview of the Alumina Refinery Process
Frequently Asked Questions

Introduction

Aluminum occurs naturally in the form of bauxite, an ore containing aluminum oxide (Al2O3), commonly called alumina. Alumina is first extracted from bauxite through a refining process and then converted to aluminum metal through an electricity-intensive smelting process.

Aluminum's unique characteristics, particularly its light weight, resistance to corrosion, high strength, and recycle-ability have made it an essential material for modern economies. Aluminum often substitutes as the preferred material for steel and plastics in automotive and building applications; copper in electricity production and transmission; magnesium, titanium composites and plastics in aerospace and defense applications; steel, plastics and glass in packaging applications; and wood and vinyl for building and construction applications.

Historical Perspective

As a capital-intensive industry, aluminum production has been dominated by large, vertically-integrated companies. Following sharp oil price increases in the 1970s, and because aluminum smelting is electricity-intensive, a number of independent smelters were started and grown in the 1980s and 1990s by parties controlling significant low-cost energy resources, most notably in Bahrain and Dubai. During most of this period, the global aluminum market grew at a slightly higher rate than world gross domestic product, driven largely by growth in the transportation sector and by technological advances that kept aluminum prices competitive. During this period, alumina supply to the independent smelters and the alumina-short consolidating aluminum groups in Russia and China was dominated by the major Western integrated aluminum companies. These companies were able to satisfy growing demand predominately through expanding and operating existing refineries at or near full capacity.

In the last decade, the industry has been substantially re-consolidating. Alcoa acquired Alumax, Inespal, Almix and Reynolds; Rio Tinto acquired Alcan which previously acquired Alusuisse and Pechiney; RUSAL and SUAL, each recently formed by consolidation of Russian smelters and CIS refineries, together with Glencore’s alumina assets were combined to form United Company RUSAL; Chalco being formed by consolidation of Chinese smelters and refineries. According to published figures, Alcoa, Chalco, Alcan, United Company RUSAL and BHP Billiton accounted for or controlled close to 60 percent of the 68 million metric tons of world-wide alumina production in 2006. On the order of 25 percent (18 million metric tons) of this total was consumed by alumina-short smelters, many of which are wholly-dependent upon market purchases, often from their aluminum market competitors, for this strategic raw material input.

The Market Today

Like many commodities, alumina is sold both on spot and contract terms. Alumina typically is priced as a percentage of the more liquid and transparent aluminum price quoted on the London Metal Exchange (LME). Contract terms historically have fluctuated in the range of 11.5 percent to 13.5 percent of the LME aluminum metal price. Spot prices have been much more volatile as the alumina spot market is a very thin market. With the recent surge in global demand, alumina spot prices sky-rocketed and contract prices tended toward the high end of historic norms.

The global aluminium market has been growing for many years at rates slightly higher than the world gross domestic product, driven largely by growth in the transportation sector and by advances in refining and smelting technologies that have kept the price of aluminium competitive compared to competing materials. 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. However, due to significantly increased production of aluminium in China, which initially resulted in a significant shortfall in alumina refining capacity, growth in the demand for alumina outpaced its historic levels.

In the middle of 2008, industry professionals forecast an increase in annual alumina demand of approximately 50 million metric tons, for a cumulative annual demand of 124 million metric tons, by 2017. Production capability would have had to be above this by approximately 5%, as current utilization rates are too high for sustainability. Most of the forecasters were predicting year on year growth in excess of 5% (representing over five million metric tons per year of new demand). To meet this demand there were preliminary plans in place for capacity expansions of existing refineries ("brown-field expansions") which, when combined with the Project's proposed refinery, would result in increased world-wide alumina production of approximately 15 million metric tons per year within the next five years. However, the potential to continue such brown-field expansions (which generally is the lower cost means of adding capacity to a refinery) at many of the existing refineries is limited by various constraining factors, including depletion of local bauxite supply, environmental factors, political concerns, limitations of existing infrastructure, availability of water and high operating costs. It was expected that the shortfall in the market would begin to ease in 2008. The disruption to the world's financial markets and banking system in the second half of 2008 have severely affected the short to medium term outlook. Industrial production, particularly in the automotive and building sectors has dramatically reduced the consumption of aluminium as much as 20% since early 2008. This volatility has resulted in a fall in the price of aluminium as smelters, even those with high operating costs, have been slow to reduce operations. The sustained operations have in turn resulted in an oversupply of aluminium. Alumina refineries have been comparatively quick to reduce production or to close refineries due to a limited market for their alumina output and the refineries at the high end of the marginal operating cost being more susceptible to a market downturn. This lower level of production will likely persist until industrial growth increases in the medium term, particularly in China and India, followed by North America and Europe. Initially, there will likely be an increase in the price of alumina and aluminium as stocks are used up before being followed by the gradual reopening of closed capacity in both global smelting and refining facilities.

The market for smelter grade alumina is primarily controlled by integrated aluminium companies. In 2008, worldwide alumina refining capacity totalled 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.

Source: International Aluminium Institute (www.world-aluminium.org)

Analysis of the components of the production cost of alumina shows that bauxite is the most important—typically accounting for as much as 30 percent of the total production cost of alumina. Also, bauxite has a cost effect beyond its simple cost as a raw material. The nature and quantity of the silica minerals in the bauxite fix the amount and, therefore, the consumption and cost of caustic soda needed to produce alumina. Bauxite and caustic together typically constitute 50 percent of the total production cost of alumina. However, there is a large variation in the cost of these components in different alumina plants based mostly on the quality of its bauxite feedstock, and the proximity of the refinery to the mine from which its bauxite is sourced.