Who'll be our first bauxite billionaire?
The Daily Reckoning, 8:41 AM Apr 7, 2008
China, as you know, has been using a lot of everything. China's economy grew at double digit rates in the last quarter. Aluminium is a key commodity for commercial and residential real estate activity. It's a lot like copper in that respect. When an economy expands, demand for aluminium increases.
To meet that demand, China has increased its production of aluminium, importing bauxite from Indonesia as well as mining its own. In the first three months of 2007, China increased its aluminium production by a whopping 40 per cent. China's ability to produce aluminium is expected to grow by 15 per cent this year, according to the Australian Bureau of Agricultural and Resource Economics (ABARE).
But there are reasons to doubt this figure.
Bauxite is cheap and plentiful. Energy is not. China and South Africa both have strained power grids. But more importantly, electric power generation in both countries comes from expensive coal.
Hydro-electric power is much more common in North America, Europe, and Latin America than it is in Asia and Africa. Africa does have some large hydro-electric dams, but they are on large rivers, and South Africa's power mostly comes from coal.
Coal prices in Newcastle, New South Wales have been rising in the last month as world demand grows and supply bottlenecks tighten. The rising cost of coal, not to mention the awful environmental side effects are beginning to add up for countries like China and South Africa. What it means – in practical terms – is that it's getting too expensive to make aluminium in countries that don't have cheap energy.
In a recent report, ABARE says: "The electricity intensive nature of aluminium production, and the fact that most electricity in China is generated from coal fired power stations, means that expansions to aluminium smelting capacity can, indirectly, have adverse environmental impacts.
"To address this issue, the Chinese Government has indicated its desire to limit the production and export of aluminium. In late 2006, the Chinese Government imposed regulations on the size, capital investment requirements and environmental standards of new smelters, and also increased the tax on exports of aluminium metal to 15 per cent (from 5 per cent)."
It's not a difficult conclusion to reach: increased power costs (and shortages) in China and South Africa will lead to lower aluminium production. There is still probably going to be a surplus this year. But the futures market is already pricing in increases later this year and early next year.
That would be a change from aluminium's recent performance. Of all the base metals it's been the big laggard. There was good reason for this, too. Bauxite is easy to mine and easy to find. Energy was cheap. Turning bauxite into alumina (refinement) and alumina into aluminium (smelting) was not a high-margin business.
But now that the energy part of the equation has changed, a shift is taking place in the global aluminium market. Aluminium production will move away from China and towards places where energy is cheaper. In fact, it's already happening.
Many countries in the oil-rich Persian Gulf are building aluminium smelters. Dubai is planning to build the world's largest aluminium smelter ever. It's a $US5 billion project with the aim of producing a smelter that can generate 700,000 tonnes per year. It is not alone.
Saudi Arabia has plans for a $US3.8 billion smelter. Oman has plans for a $US2.2 billion smelter. Qatar has plans too.
Saudi Arabia has also said it has plans for a $US7 billion "mine-to-metal" project that includes bauxite mining, refining and aluminium smelting. It calls this the "third pillar" of its oil and petrochemical strategy.
It's an attempt at economic diversification that does not include loaning billions of dollars to struggling American financial institutions. You can argue about whether or not it makes sense for the Gulf States to become aluminium producers. But you can't argue that they have the energy to do it. China and South Africa can't say the same.
What do the Gulf States lack? To make aluminium you need bauxite, electricity and the capital to build a smelter.
Capital? Check (the Aussie firm Worley Parsons got a $AU300 million contract to do work on the Saudi smelter). Electricity? Check (plenty of oil and gas, for now.) Bauxite? Hmmn.
Well there's plenty of that in Guinea and Australia, isn't there?
Rio Tinto is supremely placed to profit from all this, especially because of the Alcan acquisition. BHP Billiton... not so much.
But if we are right and the rising cost of energy forces a shift in global aluminium production away from China and toward the Middle East...what is the best way to profit from this?
Bauxite? Alcoa? Or infrastructure firms building smelters in the ME? Or all three?
The answer to that question can be found in what happened with Australia's iron ore business. For many years it was dominated by just a handful of companies, mostly BHP and Rio Tinto.
Then, a few visionary entrepreneurs saw the changes coming (that China would be a big customer for years). You know the rest of the story. Chinese, Japanese and Korean steel companies are inking deals with anyone who can produce iron ore, from Rio Tinto and BHP all the way down to much, much smaller producers.
One of the best performing stocks on the ASX last year was Murchison Metals, a small producer in the Mid-West (not the Pilbara). And Fortescue Metals, which hasn't actually produced any iron ore at all, did even better: "Major players such as Fortescue Metals Group (up 460 per cent in 2007), Murchison Metals (up 182 per cent) and Mount Gibson Mining (up 215 per cent) are expected to benefit from higher contract iron ore prices to be negotiated later this year," according to the Herald Sun.
The path to Australia's first big bauxite fortune will look a lot like the path Andrew Forrest trod in iron ore. Forrest – who according to Forbes magazine is Australia's richest man – realised he didn't need to compete with BHP and Rio Tinto. Just becoming Australia's third biggest producer of iron ore would be enough to make him a very rich man.
He was right. Incredibly, Forrest's company Fortescue Metals has yet to ship any actual ore to China. But the inherent sense of the business proposition – and rising iron ore prices – have propelled the stock to amazing heights anyway.
Incidentally, while Warren Buffett took the crown as the world's richest man this year (net worth of $US72 billion), India had four men in the top ten. Russia had 87 billionaires on the Forbes list. Russia's richest man, Oleg Deripaska, is the world's ninth richest. He made his money in Russian aluminium, not in Russian oil.
http://www.businessspectator.com.au...-first-bauxite-billionaire-DFTZC?OpenDocument
The Daily Reckoning, 8:41 AM Apr 7, 2008
China, as you know, has been using a lot of everything. China's economy grew at double digit rates in the last quarter. Aluminium is a key commodity for commercial and residential real estate activity. It's a lot like copper in that respect. When an economy expands, demand for aluminium increases.
To meet that demand, China has increased its production of aluminium, importing bauxite from Indonesia as well as mining its own. In the first three months of 2007, China increased its aluminium production by a whopping 40 per cent. China's ability to produce aluminium is expected to grow by 15 per cent this year, according to the Australian Bureau of Agricultural and Resource Economics (ABARE).
But there are reasons to doubt this figure.
Bauxite is cheap and plentiful. Energy is not. China and South Africa both have strained power grids. But more importantly, electric power generation in both countries comes from expensive coal.
Hydro-electric power is much more common in North America, Europe, and Latin America than it is in Asia and Africa. Africa does have some large hydro-electric dams, but they are on large rivers, and South Africa's power mostly comes from coal.
Coal prices in Newcastle, New South Wales have been rising in the last month as world demand grows and supply bottlenecks tighten. The rising cost of coal, not to mention the awful environmental side effects are beginning to add up for countries like China and South Africa. What it means – in practical terms – is that it's getting too expensive to make aluminium in countries that don't have cheap energy.
In a recent report, ABARE says: "The electricity intensive nature of aluminium production, and the fact that most electricity in China is generated from coal fired power stations, means that expansions to aluminium smelting capacity can, indirectly, have adverse environmental impacts.
"To address this issue, the Chinese Government has indicated its desire to limit the production and export of aluminium. In late 2006, the Chinese Government imposed regulations on the size, capital investment requirements and environmental standards of new smelters, and also increased the tax on exports of aluminium metal to 15 per cent (from 5 per cent)."
It's not a difficult conclusion to reach: increased power costs (and shortages) in China and South Africa will lead to lower aluminium production. There is still probably going to be a surplus this year. But the futures market is already pricing in increases later this year and early next year.
That would be a change from aluminium's recent performance. Of all the base metals it's been the big laggard. There was good reason for this, too. Bauxite is easy to mine and easy to find. Energy was cheap. Turning bauxite into alumina (refinement) and alumina into aluminium (smelting) was not a high-margin business.
But now that the energy part of the equation has changed, a shift is taking place in the global aluminium market. Aluminium production will move away from China and towards places where energy is cheaper. In fact, it's already happening.
Many countries in the oil-rich Persian Gulf are building aluminium smelters. Dubai is planning to build the world's largest aluminium smelter ever. It's a $US5 billion project with the aim of producing a smelter that can generate 700,000 tonnes per year. It is not alone.
Saudi Arabia has plans for a $US3.8 billion smelter. Oman has plans for a $US2.2 billion smelter. Qatar has plans too.
Saudi Arabia has also said it has plans for a $US7 billion "mine-to-metal" project that includes bauxite mining, refining and aluminium smelting. It calls this the "third pillar" of its oil and petrochemical strategy.
It's an attempt at economic diversification that does not include loaning billions of dollars to struggling American financial institutions. You can argue about whether or not it makes sense for the Gulf States to become aluminium producers. But you can't argue that they have the energy to do it. China and South Africa can't say the same.
What do the Gulf States lack? To make aluminium you need bauxite, electricity and the capital to build a smelter.
Capital? Check (the Aussie firm Worley Parsons got a $AU300 million contract to do work on the Saudi smelter). Electricity? Check (plenty of oil and gas, for now.) Bauxite? Hmmn.
Well there's plenty of that in Guinea and Australia, isn't there?
Rio Tinto is supremely placed to profit from all this, especially because of the Alcan acquisition. BHP Billiton... not so much.
But if we are right and the rising cost of energy forces a shift in global aluminium production away from China and toward the Middle East...what is the best way to profit from this?
Bauxite? Alcoa? Or infrastructure firms building smelters in the ME? Or all three?
The answer to that question can be found in what happened with Australia's iron ore business. For many years it was dominated by just a handful of companies, mostly BHP and Rio Tinto.
Then, a few visionary entrepreneurs saw the changes coming (that China would be a big customer for years). You know the rest of the story. Chinese, Japanese and Korean steel companies are inking deals with anyone who can produce iron ore, from Rio Tinto and BHP all the way down to much, much smaller producers.
One of the best performing stocks on the ASX last year was Murchison Metals, a small producer in the Mid-West (not the Pilbara). And Fortescue Metals, which hasn't actually produced any iron ore at all, did even better: "Major players such as Fortescue Metals Group (up 460 per cent in 2007), Murchison Metals (up 182 per cent) and Mount Gibson Mining (up 215 per cent) are expected to benefit from higher contract iron ore prices to be negotiated later this year," according to the Herald Sun.
The path to Australia's first big bauxite fortune will look a lot like the path Andrew Forrest trod in iron ore. Forrest – who according to Forbes magazine is Australia's richest man – realised he didn't need to compete with BHP and Rio Tinto. Just becoming Australia's third biggest producer of iron ore would be enough to make him a very rich man.
He was right. Incredibly, Forrest's company Fortescue Metals has yet to ship any actual ore to China. But the inherent sense of the business proposition – and rising iron ore prices – have propelled the stock to amazing heights anyway.
Incidentally, while Warren Buffett took the crown as the world's richest man this year (net worth of $US72 billion), India had four men in the top ten. Russia had 87 billionaires on the Forbes list. Russia's richest man, Oleg Deripaska, is the world's ninth richest. He made his money in Russian aluminium, not in Russian oil.
http://www.businessspectator.com.au...-first-bauxite-billionaire-DFTZC?OpenDocument
