Guinea bauxite reserves: Aluminium, down but not out

Nigeria

Rusal’s former biggest asset in Africa is a source of some contention as the dispute over the Aluminium Smelting Company of Nigeria (Alscon) rages on. BFI Group, a Nigerian-American concern, bid $410m for the company is 2004 but was disqualified for alleged bribery by the regulator. Rusal, the Russian aluminium giant, then purchased 75% of the company for $250m in 2007. The Nigerian authorities began an investigation in 2009 into why an asset they believed was worth $3bn was sold so cheaply. 

The beleaguered smelter has been operating – if at all – at around 10% of its 200,000 tonne capacity in the last couple of years. The battle over its ownership, as well as unreliable supplies of natural gas, have severely hampered productivity. In July 2012 a Nigerian court ruled in BFIG’s favour, vesting ownership of Alscon in the company and stripping Rusal of their 85% stake. Rusal disputes the decision and vicious accusations have been levied by each side against the other, involving theft, corruption and fraud.

Warehousing

But one of the biggest controversies is overseas. There is a major dispute over London Metal Exchange (LME) warehousing practices that buyers believe artificially inflate prices by restricting and slowing supply. Buyers allege that an extra $3bn charged is equivalent to one additional US cent per can to the consumer. Rusal and Alcoa have been squaring up against MillerCoors and Novelis. Tim Weiner, MillerCoors’ global risk manager of commodities and metals, testified to a US Senate subcommittee that “Under this Federal Reserve exemption, US bank holding companies have effective control of the LME, and they have created a bottleneck which limits the supply of aluminium. Aluminium prices in general, and for can sheet in particular, have remained inflated relative to the massive oversupply and record production.” 

Banks such as Goldman Sachs (who own Metro International Trade Services and so control much of North American aluminium stock traded on the LME) and JP Morgan are also accused of profiteering by hoarding aluminium and through storage charges – claims they reject.

Goldman Sachs, who are being sued by parties alleging its actions have driven up prices, has put forward a refutation of the argument that long queues lead to higher prices. Independent research commissioned by the bank argues that the price of aluminium, when all cost factors are taken into account, has not been significantly altered by warehouse queues. 

Over 80% of all non-ferrous metals trading takes place at the LME, with the prices discovered there set the global benchmark. Under new CEO Garry Jones, it looks set to act to reduce hoarding and take new powers to enforce compliance, limiting waiting times to fewer than 50 days by insisting warehouse to transfer more stock out than they take in. At some warehouses it is over a year. The LME rule changes are likely to have a significant effect on shaping the future market. The Federal Reserve is also examining the role of banks in commodity trading and infrastructure.

Wrong incentives

Aluminium prices are currently in a state of contango, that is, forward prices exceed spot prices. This provides an incentive to hold onto stocks. Cheap money may well be distorting the market through speculative purchases and whilst future prices encourage hoarding, even LME rules changes will probably shift the problem rather than solve it – perhaps through stocks moving elsewhere, potentially making the market more opaque. 

Aluminium is increasing being used as collateral for loans in what are known as financing transactions. Bloomberg estimate as much as 80% of aluminium stocks and 60% of zinc is tied to such transactions.

Long-term outlook

But the long-term looks a lot kinder. The UN has identified a trend towards megacities – cities with more than 10m inhabitants. Currently there are 23. By 2025, it says there will be 36. This will take a vast amount of resources, not least aluminium. Guinea will play a vital role in supplying the bauxite required, giving it an amazing opportunity for transformative development. President Conde’s new mining code is a canny step to seize this opportunity. Increasing environmental standards for vehicles means lightweight, strong aluminium may be used as a substitute for steel.