Chinese Aluminum Production Moving Into Balance

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Could China’s rampant expansion of aluminum capacity and market oversupply finally be coming to an end?

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Where government controls and environmental pressures have failed, good old market economics may finally be picking up sway. Of course, it isn’t quite that simple. Some of the credit must go to federal pressure on state governments to reign in subsidies and support, but it would seem if a Reuters article is correct that the closure of some 2 million tons of capacity this year, coupled with still-rising demand, is finally closing the excess capacity gap.

An analyst quoted by Reuters forecasts a surplus of less than 500,000 metric tons, said to be half the 1 million tons touted by analysts and smelters earlier in 2014. Smelters closed about 2 million tons of high-cost capacity between late 2013 and May 2014 as prices dropped to five-year lows. Although, worryingly, around 200,000-500,000 tons has come back online as domestic prices rose from March onward, with more restarts expected later this year.

Demand and supply are even predicted to be in balance this year, according to government predictions but the willingness of smelters to bring capacity back online at the slightest price increase actually makes that unlikely, but production this year is still expected to come out at 28 million tons, down from 28.3 millions tons expected earlier this year.

Semi-finished products such as rolled and extruded items, meanwhile, hit another output record in May while exports rose 7% year-on-year in the first five months of 2014 as Chinese fabricators begin to enjoy a raw material advantage over the rest of the world. Prices to western and Japanese mills are in the region of $1900/ton LME plus $400/ton physical delivery premium, while Chinese rolling mills are only paying about $2200/ton duty paid for their metal, a turnaround from last year when Chinese mills paid more than western consumers.

Although primary metal prices are expected to rise this year in China, some states such as Henan and Guizhou, are either planning or have already extended power subsidy deals to smelters to support local producers, according to Reuters. As a result, up to 700-800,000 tons of idled capacity could come back on stream, half of it in Guizhou, if demand remains robust.

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