Picture: ISTOCK
Picture: ISTOCK

London — The aluminium market risks being thrown back into turmoil after the world’s largest refinery of a key raw material was shut.

Norsk Hydro said it will temporarily close the Alunorte alumina refinery in Brazil because of a dispute over waste treatment. The plant was already running at just 50% capacity, and prosecutors have said it would take at least a year to meet their demands to resume full production.

The stoppage will increase the scarcity of alumina — a key ingredient for producing aluminium — and raise the possibility of higher metal prices filtering through the global supply chain, which would affect manufacturers such as car makers and canned drink suppliers. The market has been tight for months due to US sanctions on Russia’s United Co Rusal.

"We seem to be out of the frying pan and into the fire for alumina," said Anthony Everiss, an analyst for CRU Group.

While there is no alumina contract on the London Metal Exchange (LME), the effect was clear elsewhere in the market today. Aluminium prices jumped as much as 3.6% to $2,194 a ton, reaching a three-month high. Norsk Hydro shares plunged as much as 14% in European trading. The news also sent shares of other aluminium companies higher. Aluminum Corp of China added 7.8%, and India’s National Aluminium climbed 11%.

Alumina is turning out to be the key swing factor in the global supply chain for aluminium, and the Norsk Hydro plant shutdown will fuel volatility as manufacturers search for supplies.

"There’s clearly now a risk that it’s going to be out for a while. That makes it pretty difficult for the alumina market," said Colin Hamilton, an analyst at BMO Capital Markets in London. "We’re looking at a period of higher-than-expected prices."

Alumina is up about 45% this year, averaging $479 a ton since the end of December, according to data from S&P Global Platts. Steep prices will encourage other companies to start up alumina production, and China has now become a net exporter, Hamilton said. He cautioned that it is too early to expect aluminium production to be curtailed.

Still, the big question for the aluminium market is whether the US Treasury will soon lift sanctions on Rusal, or force companies to cut ties — which would cause another round of chaos for the market. The two sides are in negotiations and there are signs of progress, but it remains a key risk.

Aluminium supply has gradually tightened this year because of the Rusal sanctions and other shortages. Inventories tracked by LME have shrunk more than 17% in the past two months.

For Hydro, the Alunorte shutdown is the latest setback in a difficult year. It has faced a long legal battle related to an alleged dam spill in February, which local regulators say contaminated rivers and wells.

Prosecutors said on Friday Alunorte was given a year to prove it could safely store waste water. Brazilian authorities also set a long list of other requirements before they will consider lifting the injunction that has kept Alunorte operating at a lower capacity.