It’s hard to understand how the Chinese market price for aluminum can be so strong and the growth in new smelter capacity so enduring when the global aluminum market is oversupplied. However, investment in new capacity is one thing. Prices are another.
Some look at SHFE prices that are way above LME and scratch their heads in wonder. SHFE prices for aluminum are in the region of 14,470 RMB per metric ton this week, a price that includes 17% domestic vat, but equates to $2,379 per metric ton at 6.25 RMB to the dollar.
Meanwhile, the LME is at $ 1,844 per metric ton. However — and this is what’s riling metals consumers in the West — the LME price is not representative of the true cost of primary aluminum in the market. To actually get delivery of metal, consumers have to pay close to a $200/ton premium as reflected by the MW Aluminum price and the FOB Rotterdam delivery premium. Add that to the LME price and then allow 17% — and you have $2390/ton. Pretty much smack on the SHFE price.
Indeed, if LME prices truly were lower than the SHFE, an arbitrage window would open up, prompting significant imports to develop. It has happened in the past, but it isn’t happening now. By all accounts, China is well supplied with aluminum. But while global aluminum production rose by an annualized 454,000 tons to 46.93 million tons in September, according to IAI figures in Reuters, the story is very different in China. Last month, China’s national run rate surged by an annualized 670,000 tons to a fresh all-time high of 22.61 million tons. In contrast, production in the rest of the world fell for the third month running, with the downward trend becoming more pronounced as capacity curtailments start to bite and new capacity is delayed.
While actual output in China is soaring, rising just over 10% in the January to September period, many producers are struggling. Chalco, for example, posted a first half net loss of over $100m and shuttered 380,000 tons of capacity, much like some Western producers. Unfortunately, even Communist China has only limited control over its private sector. The Ministry of Industry and Information Technology estimates that some 10 million tons of capacity are currently being built, with at least 1.3 million tons of that due to start up in the Northwest province of Xinjiang over the second half of this year.
Stay tuned for the second part of this post.