FEW MIGHT have guessed that Guinea, a west African country of 13m people, played a big role in global commodity markets. In recent years the country has ramped up its production of bauxite, a dirty-red ore that is processed to make aluminium, thanks to hefty investment from China. In 2020 Guinea produced around 90m tonnes of the stuff, about a quarter of the global total, up from 21m in 2015. It now supplies more than half the bauxite used in Chinese refineries. And those refineries, in turn, produce more than half the world’s aluminium.
Small wonder then that the military coup that threw Guinea into turmoil on September 5th also reverberated in commodity markets. The price of aluminium went on to reach its highest level in ten years. (Guinea is also home to Simandou, one of the world’s richest untapped deposits of iron ore. Share prices in China Hongqiao and Rio Tinto, two investors in Simandou, dipped when news of the coup broke.)
Guinea is only the latest factor behind the surging aluminium price. So far this year it has shot up by around 40%, faster than that of any other highly traded metal. One reason is growing demand. Locked-down consumers slurped more beverages at home, boosting demand for aluminium cans. As economies have slowly recovered from the deep downturn of 2020, demand for aluminium for construction has picked up. Sales of electric vehicles, which tend to contain a bit more aluminium than conventional cars, have pushed up demand, too.
Supply constraints, however, have been more important. In August a fire put a large refinery in Jamaica out of action. Rio Tinto is trying to resolve a workers’ strike at a smelter in Canada. Even bigger disruptions stem from China. Making aluminium uses a huge amount of energy (some traders refer to the metal as “congealed electricity”). New energy-consumption targets have led some provincial authorities, such as those in Inner Mongolia and Xinjiang, to scale back aluminium production. Drought in Yunnan, meanwhile, has limited the supply of hydropower. Together these could lower Chinese annualised aluminium output by about 5%, estimates Gregory Shearer of JPMorgan Chase, a bank.
Whether the coup in Guinea will limit supply further is unclear. So far, mines in the country are still running, ships are still being loaded with bauxite and warehouses in Chinese ports are well stocked. That may explain why the price reaction has been modest (see chart). But analysts worry that other countries will impose sanctions on the new government, or that the new regime itself will tax miners. Either would disrupt the flow of bauxite out of Guinea.
Even then, however, bauxite is abundant enough that Chinese refineries have other options. This suggests that a bigger concern for the aluminium market is where Chinese regulations go next. Authorities are already worried about soaring metals prices hurting Chinese manufacturers. They have released some aluminium, along with other metals, from their strategic reserves to try to curb inflation.
This objective bumps up against others. One is the energy-consumption targets. Another is a limit on China’s aluminium output, set in 2017, when authorities thought the country was producing too much. If Chinese refineries start to restrict production as they approach the threshold, prices may rise until new capacity is built elsewhere.
One possibility is that China starts to move production abroad, to countries where labour is cheap. Indonesia is a possible location. Some nickel production has already moved there and China Hongqiao, the world’s largest aluminium producer, recently said it would expand its refinery operations there. Guinea’s new rulers may end up selling their bauxite to Indonesian firms—with China’s help, of course.