As our old friend Chuin-Wei Yap at the WSJ in Beijing recently observed, in spite of chronically low aluminum prices and massive global overcapacity of supply, China continues to invest in new smelters in its northwest region.
In fact, as the article reports, Xinjiang Qiya Aluminum & Power Ltd., earlier this month commissioned one of the world’s largest aluminum smelters in the Xinjiang-Uighur Autonomous Region. Exploiting billions of dollars of government-supported, coal-powered electricity production, the new smelters are continuing to add capacity even as questions are being raised about the logic of building smelters long distances from imported bauxite points of entry and nearly as far from consumers – processors and fabricators sited close to end users of the finished products.
Power costs may be sharply lower than in the coastal regions, but transport costs remain high. Still, with electricity making up to half of the cost of a ton of primary aluminum, the numbers, for the time being, seem to stack up – new Western smelters are said to be margin-positive even at current prices.
Some producers, such as Aluminum Company of China (Chalco), are buying their own smelters to future-proof against the government driving through power cost increases; Beijing is losing patience with the industry’s appetite for new smelter construction and resistance to capacity closures.
Meanwhile, in the rest of the world, the probability that low prices are likely here to stay is finally forcing Western smelters to follow Alcoa and Rusal’s lead, both of whom have been trying to encourage the industry to cut less efficient production in an effort to bring supply into balance.
Alcoa, Rusal Production Cuts – Not Enough?
Russia’s Rusal, the world’s largest aluminum producer by output, has already cut 350,000 tons of production capacity compared with last year, closing three smelters, and more are expected in western Russia, while Alcoa, the world’s second-largest producer of aluminum, has shuttered around 13% of its global smelter capacity and has put another 460,000 tons under review, according to a Reuters report.
Much more needs to be done, though.
CRU estimates it will take until 2017 to force the shutdown of 700,000 to 1 million tons of annual production capacity outside China, even if new LME rules reduce the premiums paid to smelters for physical delivery of metal and hasten the process; longer if they fail.
Indeed, it is only those physical premiums that are allowing some smelters to make any return. Physical premiums have eased slightly in Europe and Asia in recent months, partly in response to expected changes in warehouse load-out rates and the premiums warehouse and finance companies are prepared to pay for delivery of primary metal into specific locations.
How that process develops in Q4 will help determine the future direction of the physical premiums and of smelter rationalization. Primary aluminum smelting will remain a challenging business for some years to come, particularly for those groups without the benefit of significant downstream value-add revenue sources.
And catch Stuart for our 2014 aluminum market outlooks at our upcoming event – click below: