JISCO's dependence on the third party alumina market

Chinese aluminium companies are increasingly looking to invest overseas and become more self sufficient along the aluminium value chain. JISCO follows SPIC and China Hongqiao Group as the third Chinese aluminium producer to invest in alumina refining assets outside of China. The deal is subject to regulatory approvals by Jamaica and China.

• For those speculating as to why JISCO has made the decision to buy alumina assets so far away from the Chinese mainland, at a time when the market is well supplied in alumina, CRU has highlighted below key factors to consider.
• JISCO is expected to be the tenth largest aluminium producer worldwide and fifth largest aluminium producer in China for the second year running in 2016, with a forecast primary aluminium production of 1.3M tonnes. Therefore, the company's metal grade alumina (MGA) demand is expected to be significant, at 2.6M tonnes this year and rising to 3.1M tpy by 2020. In that year, JISCO's MGA demand taken as a share of Chinese net alumina imports would be 87%.
• JISCO currently does not own any alumina refining assets in China and is therefore wholly dependent on the third party alumina market. In contrast, the four Chinese aluminium producers, which ranked higher in terms of aluminium production, are fully or at least partially integrated with their own alumina assets. Even the two Chinese producers than succeed JISCO in the worldwide aluminium production rankings are also partially integrated.
• The desire to back integrate would be a driving force behind a purchase of alumina assets in the Atlantic, a market that is well supplied in alumina. Provided the purchase goes ahead as planned, JISCO could slowly bring on Alpart's alumina capacity as their current alumina contracts unwind.
• At the conclusion of this deal, JISCO would have paid about $181.2/t of alumina capacity for a 46 year old plant (c.f. $1,500/t of alumina capacity for a new plant). Aside from the capital cost, JISCO would still need to make investments to modernise the plant. CRU understands that two lines, with a total capacity of 1.1M tpy, can be operated with minimum refurbishment, while a third line is modernised.
• At full capacity, Alpart would only fill about 50% of JISCO's third party MGA requirements by 2020. This means that JISCO would still be exposed to the third party market to the tune of about 1.5M tonnes.
• Crude oil and freight prices are currently attractive, still at multi year low levels. However, intrinsic in the purchase of Alpart is the risk that rising freight and rising crude oil prices will raise delivered alumina costs. Long term, an investment in captive assets is expected to put JISCO in a more favourable cost position when alumina prices rise.
• There is some concern that the re-start of Alpart, as early as 2017, will raise the alumina surplus in the world ex. China and add downward pressure to alumina spot prices and delay recovery in prices. There is also the risk that Alpart could be used as a lever in the world ex. China alumina market to keep alumina spot prices low. Provided the sale goes ahead, the purchase of alumina assets should be viewed as strategic, shoring up JISCO's position over the long run.