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Wood Mackenzie outlines China's importance in re-shaping global aluminium industry

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Global Mining Review,

Following Wood Mackenzie's participation at this year's Arabal conference, Head of Aluminium Research, Edgardo Gelsomino, outlines China's importance in re-shaping the global aluminium industry.

"We estimate that net primary aluminium capacity growth in this country will be just over 5 million t between 2017 and 2021. Further capacity additions will be sparse and limited, as new approvals are becoming increasingly difficult to obtain. There also exists a natural disincentive to expand smelter capacity in the country, as domestic demand for primary aluminium is expected to peak towards the end of the next decade," says Gelsomino.

Yet, according to Wood Mackenzie estimates that assume a moderate deceleration of the global economy, the world needs some 10 million t of new smelter capacity by 2027, and twice as much alumina refinery capacity, to meet future global demand.

"China's astronomic growth was made possible by the use of coal as the main fuel for thermal power plants. With the exception of India and some parts of Southeast Asia, new aluminium capacity outside China will be forced to rely more heavily on non-coal sources of power, with gas-fired and hydro power plants playing an integral role.

"Capital intensity of aluminium smelters and alumina refineries in China has historically accounted for approximately 40% of the required capital for equivalent projects in the rest of the world. Therefore, covering the future supply gap with new production outside China will require a higher capital expenditure than what has been observed over the past decade. We estimate the total capital cost of the required 10 million t new smelter capacity needed by the second half of the next decade could be as much as US$30 - 40 billion. Producers will also require up to US$15 - 20 billion in order to build new alumina refineries, not to mention the investment required to build an additional 15 GW of power to support the smelters.

"The first challenge will be to find locations offering both an abundant source of competitively priced power and a friendly investment environment. In addition, smelters and refineries will need to be given access to raw materials. In existence are smelter projects in the Middle East, coal-based projects in India and Southeast Asia, hydro-based projects in Southeast Asia, Northern Europe and North America, and unutilised resources in the politically-challenging Venezuela. There are other regions in South America and Africa with hydro power potential but the development of those sources will take a significant amount of time," continued Gelsomino.

Wood Mackenzie estimates that, at a required rate of return of 15%, the incentive price at which investors would be willing to build new alumina capacity is US$430/t. For aluminium smelting, this figure sits at around US$2350/t. Assuming lead-times of around five to seven years for the development of aluminium production facilities, investment decisions need to be made soon to avoid a supply crunch in 2025 and beyond.

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