Alumina is the main raw material for aluminum, so refineries usually sell alumina to aluminum smelters. Aluminum is widely used in many areas from cars to cookware.
China is the world's largest consumer and producer of aluminum. A weaker alumina price will likely boost China's aluminum production and curb import demand. Alumina typically accounts for 40% of the cost of primary aluminum production.
According to sources of smelters, the spot alumina price in the Chinese market this week was about 2,350-2,550 yuan per ton, lower than the price of about 2,800 yuan in January. Traders said the price is also below the imported alumina duty-paid price of about 2,550-2,650 yuan.
This month, the spot price of a shipment of alumina cargo sold to China was $347 per tonne, compared to more than $350 in April.
In contrast, Shanghai aluminum futures prices rose more than 1% from a low this year in January to 12,785 yuan, supported by large-scale smelters to limit spot sales.
“The import cost has been higher than the domestic alumina price this year, and most imports are long-term,” said a trade manager at a state-owned aluminum smelter, who declined to be named because he was not authorized to comment on the media.
China's alumina imports in January-April 2015 plummeted 40% from the same period last year.
The above trade manager said that due to the decline in coal and electricity prices, the production costs of many alumina smelters in China have fallen. He estimates that the current production cost is about 1,600-2,300 yuan per ton.
A futures company analyst said that this was down by 200 yuan from the fourth quarter of 2014, as the profit increased the refinery to expand alumina production capacity.
In March and April, China's alumina production reached a record 4.8 million tons, with annual production equivalent to about 57.6 million tons, and China's annual alumina production capacity of more than 60 million tons.
The analysts said that at least 2 million tons of new capacity will be put into production in May and June. Most of them are owned by aluminum smelters, which reduces their purchases of alumina.
The increase in production will weigh on the price of domestic alumina in the second quarter, even though about 2 million tons of new aluminum capacity may be put into production.
Two tons of alumina are typically used to produce one ton of aluminum.
But Nic Brown, head of commodities research at Natixis, said the drop in alumina prices could be a sign of a slowdown in China's aluminum production.