Industry experts continue to predict that China’s aluminum industry will start shutting down en masse due to low prices not meeting the cost of rising power prices and restricted energy supply. Some point to falling SHFE inventories and rising imports as evidence the domestic producers are already failing to produce enough metal. A slightly misleading headline in the FT this week read “China’s Aluminium Imports Poised to Soar,” only because details of the CRU report it was covering; what the research house was actually saying was imports may reach 1 million tons by 2020 not exactly an imminent development, then.
The basis of CRU’s analysis, and indeed of many other sources’, is that higher prices for energy, labor and raw materials would make China’s vast aluminum industry less competitive, relative to producers outside the country. Rusal added their voice to the debate this week: “If the current price level remains, then 10-15% of world output will fall away or be mothballed in the first half of 2012,” Vladislav Soloviev, Rusal’s first deputy CEO, is quoted as saying. “At current prices, about a quarter of world production is unprofitable,” he continued, citing China, as well as Europe and North America.
In spite of China’s construction industry failing to meet its 2011 targets for the construction of affordable housing (a report in the FT said a third of projects were just holes in the ground; housing starts had been measured by when foundations were dug, regardless of whether any further work was done), the aluminum industry is still running at capacity and yet failing to meet demand. A Standard Bank reports says the country continues to import primary aluminum to top up domestic supply, with September imports of 10.8 kt, showing an increase of 40 percent year-on-year.
This is despite the fact that in September, Chinese aluminum production hit an all-time daily high, equivalent to an annualized 19.24 million tons. So far, there is little to suggest that low power availability and high-power tariffs are having a significant impact on total output. Where production losses are occurring, such as in the hydro-power-starved Guangxi province, increases in Western provinces such as Xinjiang are quickly filling the gap, according to the bank.
Rusal, CRU and others may be right: the producers’ willingness to produce at what outsiders are suggesting are loss-making prices may dwindle as the months go by, but so far there is no evidence that that’s the case. Rusal is cautious not to say higher Chinese imports would boost the price dramatically, saying instead that high Western stocks will counterbalance the normal upward pressure on prices imports would make, but as we have seen in the last year or so, bank and hedge fund appetite for these long-term finance schemes shows no sign of abating.
When physical demand adds to investor demand, the physical premiums rise. Recently they have not shown the market to be distressed, but a rise in Chinese imports combined with some stability in Europe could be enough to see higher prices next year that is clearly what Rusal, and much of the industry, is hoping.