And we don’t mean in terms of facing closures. A report by Reuters quoting Chinese sources paints a picture of an industry on the cusp of shooting itself in the foot.
Prices on the Shanghai Futures Exchange (SHFE) have risen from a low of CNY 9,710 per metric ton ($1,504) in November last year to CNY 11,945 today ($1,850), a 23% rise in just a few months.
In part, the rise has been due to an announcement by six Chinese smelters last December that they would stockpile one million metric tons of metal expressly to support prices. This came on the heels of wider plans to shut some 4.6 million mt of capacity or about 10% of output, a move encouraged by Beijing and, no doubt, sweetened with promises of financial assistance if they did.
Both steps added to sentiment, even though the stockpiling plan has yet to be implemented and it is unclear how much of the 4.6 mmt of capacity has been closed. Certainly, loss-making plants such as Chinalco’s Liancheng smelter, all of which had high production costs, were closed. Liancheng ishighly unlikely to reopen but production costs across the Chinese market vary widely.
Reuters quotes Xu Hongping, an analyst at China Merchants Futures, in saying production costs for the majority of the idled capacity are about CNY 11,000 per mt but added restart expenses would push up the breakeven mark to about CNY 12,500. The suggestion is that should the price reach about CNY 12,000 per mt, idled smelters could be encouraged to come back onstream.
The 1 mmt stockholding plan has been quietly sidelined for now. If the market is rising on the back of suggestions then the smelters probably figure they don’t need to go to the pain of actually implementing the plan.
Why Are People Speculating?
An issue not addressed in the article, though, is the speculative element in last year’s dramatic falls. The underlying fundamentals were undoubtedly dire for aluminum and that hasn’t changed markedly since the low point last November. But November’s low was plumbed to no small extent because of the actions of highly aggressive short speculators on the SHFE.
Andy Home, writing in Thomson Reuters this week about copper, noted that aluminum had also suffered mass bear raids, with volumes and open interest spiking to previously unseen levels in November. Although the spikes lasted only a few days, the action drove down prices, without which it is debatable if aluminum would have hit its CNY 9,710 per mt low.
Of course, there is nothing to stop the speculators coming back, they have taken repeated hits at copper over the last 12 months or more and the fundamentals for aluminum look no more solid than for copper. Sentiment has been helped by the rise in price on the back of mills’ stockholding plan and promises of smelter closures, but if the stockholding doesn’t happen, and a number of smelters are brought back onstream, that narrative could be fundamentally undermined.
The most likely outcome is China’s aluminum producers are going to self-cap prices by raising production if prices move much higher. They have shown poor discipline in the past and there is nothing to suggest that has changed.