Alunorte Alumina Refinery's Prospects Are Improving

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Includes: NHYDY
by: MetalMiner

Original Post

By Stuart Burns

Brazil's Institute of Environment and Renewable Natural Resources, known as IBAMA, has lifted the embargo on Norsk Hydro's (OTCQX:NHYDY) Alunorte alumina refinery, several headlines are saying, encouraging many to think full production of alumina will start flowing from Hydro's massive plant in the near future.

But while it is correct that IBAMA has lifted an embargo, it is only IBAMA's embargo that is so far lifted - an embargo placed on the bauxite residue deposit area (DRS2).

The decision to lift the embargo came after successful trials of Hydro's press filter technology earlier this month, in which the firm successfully demonstrated its "state of the art" - in Hydro's words - technology could process bauxite residues to a high enough standard to satisfy SEMA, the local environmental agency in the state of Pará, that the new treatment area DRS2 would be safe.

However, the embargo on DRS2 from the federal court system remains in place; a return to 100% of production capacity cannot be resumed until that court order is lifted.

So, while we are all aware of the crippling impact the restrictions have had on output from Alunorte and the resulting volatility news and counter news is having on the alumina market (and by extension, aluminum markets), what is less clear is when it will finally be resolved. It is only by understanding the cause that one can appreciate why it is taking time to achieve a solution.

The Court of Justice of Pará ordered Alunorte on February 28 to reduce to 50% of production capacity at its alumina refinery, according to Norsk Hydro press releases, following concerns that the heavy rains led to leaks from the bauxite residue deposit containment ponds to the nearby river, causing contamination. The court also required Alunorte to suspend its operation of the bauxite solid residue deposit DRS2, and that a new operating license would be granted only when the integrity of the deposit was fully verified.

The decision to reduce output by 50% rather than close it completely was in part due to a determination made by the Secretary of State for Environment and Sustainability of Pará (SEMAS) that the Alunorte refinery could safely operate at 50% of capacity, but also recognition that with the Brazilian state and partner in the plant and nearby aluminum mill Albras heavily reliant on Alunorte's alumina, a full closure would have been catastrophic.

To read Norsk Hydro's press releases, one would think we are talking of fresh water discharges from a leaky pipe or run-off from a coal shed roof, but the reality is more serious than that.

As a Norwegian site reported back in the spring, the series of discharges into the local river were unlicensed, and although the authorities were notified, the local population was not.

In addition to treated water, the toxic bauxite residue deposit known as "red mud" was also released during February of this year, risking the prospect that drinking water supplies downstream of the plant were polluted for several hundred families. Norsk Hydro would claim the releases happened at a time of heavy rains and were needed to release pressure on containment pools, which it must be said did not fail, as early reports suggested.

However, SEMA rightly questioned why, in an area with typically high seasonal rainfall, the pools were not designed to cope with such conditions. The releases were not accidents but the result of deliberate decisions. If the decision to ease pressure by releasing was taken then, so too could a warning to the local population not to drink the water until the pollution had passed and it was safe again.

To what extent the 50% restriction on Alunorte is a punishment and to what extent it is a precaution contingent on guarantees new measures are in place prior to a return to full capacity is unclear. There is a fair combination of economic necessity, environmental safeguards and, no doubt, politics in the mix.

At some stage, full production will resume - possibly by the end of this year, now that this new press refining technology has been approved.

Since Alunorte is such a key part of the alumina supply chain, aluminum mills' margins have been under pressure as a result of the elevated alumina prices. At full capacity, the plant can produce some 6.4 million tons of alumina, or 10% of the world's capacity outside China. Its impact on the alumina market has been likened to that U.S. sanctions on Rusal (OTC:RUALF) had on the aluminum market (another still-unresolved source of potential volatility).

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