Guinea Coup Poses Supply-Chain Risks for China’s Aluminum

(Bloomberg) -- Aluminum traded near the highest since 2011 after a military coup in Guinea triggered uncertainty in a key part of the metal’s global supply chain.

The coup’s leader, Colonel Mamady Doumbouya, said Monday he wants “continuity of production” in mining, and for existing mine agreements to be honored. 

Still, commodity investors will be watching closely as the coup unfolds. Here’s what’s at stake.

What’s Guinea got to do with aluminum?

It’s all about bauxite, a dirty-red ore that gets heavily processed to become the shiny aluminum used in cars and drinks cans. From next to nothing in 2015, the West African nation emerged as a key producer of bauxite, with nearly all of its exports sent to China’s vast aluminum industry. 

The ready availability of cheap, high-quality Guinean bauxite helped cement China’s position as global leader in aluminum output. But it also leaves the world aluminum market exposed to disruptions in the African country. A fifth of the world’s aluminum is derived from Guinean raw materials, according to Russian billionaire Oleg Deripaska.

Why are prices rallying?

The outcome of the coup attempt is unclear, but the political turmoil offers a test for this relatively new supply chain. Investors need to mull a range of possibilities, from a relatively peaceful power transfer in Conakry that preserves the bauxite status quo, to more disruptive scenarios that curb shipments. Prices edged lower, after closing at the highest since May 2011 on Monday.

Any disruptions would mean higher raw material prices, raising costs for China’s aluminum sector that’s already under pressure from increasing power prices and a government crackdown on polluting industries. In an interview two years ago, one veteran of China’s aluminum industry warned about the country becoming too reliant on Guinea. 

Who are the winners and losers?

The clearest loser in trading on Monday was China Hongqiao Group Ltd., part of the closely held aluminum group that pioneered the purchase of Guinean bauxite. Its 2020 annual report said the company “maintained annual bauxite capacity” in Guinea of 50 million tons. China’s total imports last year were 111 million tons. Shares rose as much as 5.1% on Tuesday, rebounding from Monday’s declines.

Big beneficiaries included aluminum-related producers outside China. The biggest of those, Russia’s United Co. Rusal International PJSC, surged almost 15% to its highest since 2012 on Monday. Australia’s Alumina Ltd. rallied as much as 9% on bets that China might need to look elsewhere for material to feed its aluminum industry. Both retreated on Tuesday. 

What are China’s alternatives?

The bauxite trade is highly concentrated, with Guinea, Australia and Indonesia accounting for 99% of China’s purchases. That means there are few other ready alternatives should Guinean shipments be disrupted.

Indonesia used to be by far the top supplier, before a three-year halt from 2014 as the Southeast Asian country slapped a ban on shipments of raw materials. Restrictions remain even after the ban was relaxed. Australia’s bauxite sales to China have so far survived the diplomatic rift between Beijing and Canberra that severed trade for a range of other commodities.

What about beyond bauxite? 

Guinea is also home to Simandou, a giant undeveloped iron ore project with backers including Rio Tinto Group and top global steel producer China Baowu Steel Group. China sees Simandou as the best bet for its steel industry to offset reliance on Australian and Brazilian iron ore, and will be closely monitoring any potential changes to the investment environment in Conakry.

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With assistance from Bloomberg