A significant rally in aluminum prices looks to be some way off. In fact, a long way off if a recent article by one of our favorite Reuters columnists is correct, and there is nothing to suggest it isn’t.
Drawing on work done by Wan Ling, aluminum specialist for CRU China, presented at the recent aluminum conference in Dubai, the article explains how even with the world in over supply for the last few years China has been adding new primary smelter capacity at the rate of 3mn tons per annum in 2007 and again in 2008. And even in 2009, smelters under construction have been completed adding another 1.5mn tons. Due to global overcapacity CRU believes 2.6mn tons of last years’ 3mn have not been activated yet. That added to this year’s 1.5mn tons, there is some 4mn tons of brand new smelter capacity standing ready to be started up if demand is deemed to be strong enough. As we reported last month, in China this doesn’t have to be end-user demand. Previously idled smelters have been brought back on line as a result of state and local government stockpiling of surplus material intended merely to support employment and local economic activity.
As production capacity in other parts of the world has been idled or closed outright, previously started projects have come to completion in the Middle East to partially offset the closures. The scale of new capacity sitting idle in China was largely under most observers radar screens and as such adds significantly to the timescale in which still rising global stocks (the LME is nearing 3.9mn tons) are likely to plateau and then decline. The Chinese, bolstered by state backed loans have always shown a readiness to invest in new production or to re-start idled production at the slightest pretext. There have been significant imports of primary aluminum into China over the few months. Our local team estimates 260,000 tons in March alone, bolstered by a $100/ton SHFE premium over the LME. If demand (real or stockpiling) is pulling in those volumes, smelters will be encouraged to start capacity, particularly as many local states have dropped electricity prices.
Going forward all this additional capacity will only further enhance China’s position as the world’s largest producer and consumer of aluminum accounting for 34% of global production last year (before the 4mn tons of additional capacity are included) believed to be about 38mn tons. Increasingly the aluminum price will be set by the decisions made in boardrooms across China and by the layers of government that seek (however ineffectively) to control those companies.