Primary Aluminum Stocks Surge in China as Rolled Product Exports Double

If you are in the aluminum business and are wondering about the increase in Chinese origin plate products being offered for sale you may be interested in an article published this week in Reuters. Recent data suggests the Chinese market is experiencing a significant surplus of primary aluminum. According to the article, stocks in China have increased more than 45% since January on increased production.

Stocks of about 1.6 million tons of primary aluminum, 1.2 times China’s February output, may now be stored in warehouses, fabricating plants and smelters compared to about 1.1 million tons in late January, smelters estimated. An administration official at a large smelter in Henan said some warehouses in Guangdong province and Shanghai city refused to accept new deliveries because they are overloaded with the metal. Apparently a trader in Guangdong’s Nanhai City, one of China’s main aluminum consuming areas, said warehouse operators had asked smelters not to send supplies for storage. More than 300,000 tons of the metal may be stored in Guangdong, he estimated.

It may be the rise in stocks has more to do with the fact smelters stayed open during the February Chinese New Year holidays producing primary aluminum while the fabricators consuming that metal closed down. Daily aluminum output in February this year rose to about 46,714 tons versus 40,710 tons in January and 44,148 tons in December when the monthly output hit a record of 1.37 million tons. Nevertheless consumption has not risen as fast as anticipated and questions are being asked about whether these rising stocks represent a softening of demand and if so could primary ingot find its way onto export markets. Because of duties levied on exports of primary metal it is unlikely ingot will be offered for export the differential between domestic and export prices is some $300 per ton for Chinese smelters, so there is every incentive to hold onto metal and hope it will be consumed. On the issue of softening demand it would appear fabricators may also have excess capacity, even though the economy appears to have grown at 11.9% in the first quarter, rolling mills are offering aluminum plate for export. China’s exports of aluminum plates, sheets and strips rose 106% to 107,848 tons in the first two months of this year. Rolled products benefit from a 13% rebate from the 17% VAT they incur on cost inputs actively supporting exports, but round bar extrusions on the other hand not only incur the 17% VAT but also suffer between a 5 and 15% export duty depending on the diameter of the bars. More varied profiles though are, like rolled products, supported by an 11% rebate making rolled products and profiles viable for export but bar products not.

The increased volume of plate exports could be a reflection of both rising premiums in export markets as those economies recover. Certainly plate premiums have increased in North America and Europe over the last 6 months, and lower domestic ingot prices relative to the LME or world price has allowed Chinese fabricators to compete this year where last year they struggled. Chinese mills are notorious for turning the export tap on and off depending the demand from their domestic market so it will be interesting to see how export volumes hold up and these primary metal stock levels fluctuate over the coming weeks certainly a metric to track going forward.

–Stuart Burns

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