South32 agrees to reopening of Brazil aluminium smelter

Aluminium is another bright spot in the commodity market as curtailed smelting capacity returns to the market.

South32 boss Graham Kerr says he is positive about the outlook for aluminium. Picture: Colin Murty

South32 boss Graham Kerr says he is “bullish” on the outlook for aluminium, as South32 signed on to Alcoa’s plans to restart production at the Alumar aluminium smelter in Brazil, allowing the smelter to run at full capacity.

Alumar has been closed since 2015, as tumbling aluminium prices, rising energy costs and the wildly swinging Brazilian currency forced closures across the country’s aluminium sector.

Alcoa said in September last year it would “immediately” begin work to return its 60 per cent share of Alumar’s capacity back online, with South32 joining its partner on Thursday.

The decision clears the way for Alumar to reach its 447,000 tonne a year nameplate capacity in early 2023, with first production expected by the end of June.

Mr Kerr said the power contracts covering South32’s share of production had been sourced from fully renewable power providers, and the timing gap between its announcement and that of Alcoa was due to the company’s need to negotiate power contracts for its share of production.

“As part of this we have to supply 350 megawatts of our own power. That‘s how the joint venture works. So we actually had to go out there and actually source that power and finalise all those contracts,” he said.

Alcoa said in September its own power contracts would be with fully renewable power providers by 2020.

“We see strong demand for aluminium as the world continues to decarbonise. And I think what will become even more attractive is finding that green aluminium, and that’s really the key for us,” Mr Kerr said.

The decision on Alumar comes with aluminium prices again rising on the back of the global economic recovery from the pandemic.

Prices for the metal spiked to long term highs of around $US3200 a tonne last October, shortly after Alcoa made its call on the partial return of Alumar’s production capacity, but fell back in the final months of the year to levels just above $US2600 a tonne.

But aluminium has made a strong start to 2022, with a tonne of the industrial metal worth $US2866 on the London Metals Exchange on Wednesday.

The price has been supported by falling output from China’s smelting sector amid an energy crisis that has pushed up power prices and forced authorities to order curbs on energy consumption.

While China is still expected to set a fresh aluminium output record in 2021 of about 38.5 million tonnes of the metal, South32’s decision to join Alcoa in sanctioning the full return of Alumar suggests it sees a buoyant outlook for the metal over the next few years.

The company also extended its exposure to the commodity in September 2021, agreeing to buy out Mitsubishi’s share in the Mozal Aluminium smelter in Mozambique in a deal that could see its stake in the smelter rise to 72.1 per cent.

The decisions at Mozal and Alumar will take South32’s total aluminium output to just under 1.3 million tonnes of aluminium a year, when Alumar is fully commissioned.

“We're bullish on aluminium. Between this and Mozal, that's allowed us to considerably lift our aluminium production – by about 28 per cent when you add the two together,” Mr Kerr said.

But it also comes as a wave of other companies return mothballed smelting capacity to the market. Last year Alcoa said it would return 35,000 tonnes of curtailed output at its Portland smelter in Victoria, with US-based Century Aluminium and India’s Vedanta also expanding output this year.

In December Russia’s Rusal – the biggest producer of aluminium outside of China – said it had achieved first output at its new 430,000 tonne a year Taishet plant in Siberia.

But high power prices in Europe and the US have also forced producers to rebalance their portfolios. Alcoa cut a deal at the end of 2021 for a two year curtailment of its San Ciprián aluminium plant in Spain, taking about 230,000 tonnes of annual production out of the market.

Two weeks before it said it would permanently close its mothballed Wenatchee smelter in the US state of Washington.

“We expect prices to sort of be relatively healthy in the short term. You‘re right about some of the other production coming back online. But if you look at China, they continue to slow their rates, driven by what’s going on with changes in their own policies around carbon, but also real side economics,” Mr Kerr said.

“Long term we still believe that China will put its cap in at about in about 45 million tonnes, and that will be driven by more stringent environmental policies.”

South32 shares closed down 5c to $3.97 on Thursday.