The Death of the Chinese Aluminum Industry Has Been Greatly Exaggerated

by Stuart Burns on

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.

–Stuart Burns

Comments (4)

  1. Stuart,

    timing is everything. Your post is a couple of weeks too late. October’s production figures show a marked decrease in output, down to 41,000t per day.

    As recently as this week, smelters in Henan province are preparing pots for shutdown. We understand at least 1 million tonnes of metal (on an annual basis) could be affected if the Shanghai metal price falls too much further. The move to cut pots hasn’t been announced yet, but watch for Dow Jones and other news wires to carry the report in the next day or two.

    Of course, most aluminium trades in China are done outside Shanghai, but it is a good gauge for real prices. And inventory levels in Shanghai are rising, but that’s because traders are rushing to sell metal ahead of the developing backwardation situation.

    Nobody can accuse the Chinese market of standing still.

    1. stuart says:

      Paul, it all depends on price. Standard Bank were saying just this morning current estimates suggest Chinese smelters cost of production is around the 16,000-16,5000 CNY/mt mark but that the trigger for large scale closures is likely around 15,000 CNY. In the meantime the burden of closures is falling more on western smelters, Rio’s Lynemouth in the UK here has just announced it is closing.
      We’ll see, interesting times.

  2. Stuart, you’ve jumped to the wrong conclusion regarding our long term study. CRU does not expect ‘large-scale closures’ in China by 2020, I am not sure how you have reached that conclusion.

    We expect huge growth in aluminium semis in China. As a result primary production will continue to grow but will not be able to meet demand needs, that’s why China will also have to import the metal from abroad.

    We expect smelting capacity in China to continue to increase throughout our forecast period.

    To find out more about our study see link below.

    1. stuart says:

      Noted Paul and the article has been amended accordingly, cheers.

Leave a Comment

Your email address will not be published. Required fields are marked *