Will China Further Depress Aluminum Prices?

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China’s purchases of primary aluminum ingot by the State Reserve Bureau combined with the government’s decision to instruct power generators to offer smelters cut priced electricity has the hallmarks of desperation about it. The Chinese authorities are no newcomers to constantly tinkering with the levers of power. After all, it has always been their approach to purport to run a free market economy while quietly pulling all kinds of levers behind the scenes to boost one industry or hold back another. No wonder foreign governments call foul from time to time. No aspect of China’s import/export performance happens without government sanction if not outright orchestration. A decision to impose a 5% import tax on primary aluminum was only headed off at the last minute because it was felt it would clash with anti protectionist noises the government had made in response to a growing tide of protectionism in the west. However, the recent decision to force generators to offer discounted power to the smelters takes some beating. In the absence of an import tax, the government has probably concluded the only way they can help smelters compete with low cost imports (the LME is at a discount to the SHFE) is to reduce the smelters’ cost of production and to remove smelter stock from the market through SRB purchases, which just encourages more imports.China’s imports to date have not been sufficient to make any impact globally on stock levels. And largely because of power costs, Chinese smelters and hence downstream producers have not been competitive for exports. If however, power generators and smelters follow the government directive, smelters will be expected to produce a significantly increased tonnage of low cost ingot which will either find its way onto the export market as primary ingot or via Chinese semis producers to be exported as flat rolled and long products. Watch the SHFE primary aluminum ingot price via MetalMiner IndX (SM).  It has been fairly steady at RMB 12,000-12,200/metric ton (US$0.80/lb) for the last month. If it begins to drop we will see the effect of cheap power feeding through into primary metal prices and can expect a resurgence of Chinese origin semi finished metals in the international market.–Stuart Burns

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