The share prices of miners Alumina Limited (ASX: AWC) and South32 Ltd (ASX: S32) are topping the leader board today as their share prices jumped to new highs.
Alumina Limited is the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index with a gain of 9% to an 8-year high of $3.04 in lunchtime trade, while South32 comes in at number three with a 6.6% jump to a record $4.22.
Shareholders in the two miners can thank Norwegian aluminium company Norsk Hydro ASA for the dramatic gains as it announced yesterday that it was preparing to shut down production from its alumina refinery Alunorte in Brazil.
The refinery is the largest outside of China and it was already running at 50% capacity due to a tiff with Brazilian authorities.
Norsk Hydro said the decision to fully curtail production was made because it was running out of space to store its bauxite residue as the Brazilian government has not given the green light on the company's "state-of-the-art press filter" or a second residue deposit area.
The decision will remove 3 million tonnes a year (Mtpa) of alumina, or around 5% of global production, and there is no obvious source of extra supply.
Credit Suisse warns that we can't count on China (the world's largest producer of alumina) to make up the shortfall either.
"The ex-China shortfall caused by the initial 50% curtailment has been balanced by China becoming a net exporter. The Australian alumina price climbed above China's domestic price, opening an arbitrage so China's contracted alumina imports were on-sold to ROW [rest of the world], and China exported its own output," said Credit Suisse.
"But we doubt China can spare another 3Mtpa, especially with winter curtailments approaching that may cut 15Mtpa."
The question is whether Brazil will be forced to reverse its embargo on Norsk Hydro's second deposit site. Investors shouldn't count on that though as Credit Suisse pointed out that Brazilian authorities didn't blink when the company first reduced output by half at Alunorte.
It's almost a certainty that alumina prices are heading higher on the back of this news. Alumina Limited is the most leveraged to higher alumina prices but you can expect meaningful consensus profit upgrades for South32 as well if the rise in the commodity can be sustained.
South32's share price may also be buoyed by a Reuters report that South African miner Exxaro is eyeing its coal assets in that country.
Alumina is refined from bauxite and is used to make aluminium. The price of aluminium has also gone up in response.
This should theoretically be good news for Rio Tinto Limited (ASX: RIO) as it's an aluminium producer, but its profits may suffer as UBS noted it gets its alumina supply from Alunorte. Rio Tinto will now have to source the commodity from the spot market.
