The China Non-Ferrous Association announced this week that leading Chinese aluminum smelters intend to axe 2.4 million metric tons of capacity in the next couple of months.
Nearly all the world’s net gain in production capacity has come from China this year and, while estimates vary, a portion of the industry, even in China, is certainly losing money at current prices.
That is the case in the rest of the world, too, with UC Rusal and Alcoa, Inc. both contemplating further closures. Inside China, the growth of new smelter capacity has been in the northwest, often based on captive, low-cost coal deposits for power generation and utilizing the latest smelter technology that, combined with large economies of scale, has made these Chinese smelters some of the lowest cost of production in the world.
Older Production Goes Offline
It would make sense, then, that as prices have fallen firms would close the higher cost older smelters on the east coast and concentrate production at the lowest cost. This year some of this older capacity has already been cut. China Merchants Futures put overall closures so far this year at more than 1.8 mmt, while a trader at a state-owned smelter estimated nearly 2 mmt had already been cut according to press reports.
Will these cuts be enough to bring the market in China into balance and stem the flow of exports? Whether primary posing as semi-finished product or real semi-finished product China’s exports have the same effect, they displace western production and depress global prices.
“If the cuts reach about 5 mmt, it would have some impact (on prices),” said Xu Hongping, an analyst at China Merchants is quoted by the Times of India as saying. State-backed research firm Antaike, estimates production will be at 31.9 mmt and demand 30.6 mmt. But this was before the current stock-market turmoil and growing evidence the Chinese economy could have slowed further.
More Capacity Being Added Despite Surplus
If the Chinese aluminum market were static the above would make encouraging reading but the reality is even as possibly millions of tons of capacity are being closed, millions more are still being added. Estimates vary but by some counts almost 3.8 mmt of new smelting capacity will be added in China this year, while a further 4.2 mt of smelter capacity is forecast for 2016. For this 2016 capacity to be achieved these projects must be well on the way to being completed and as such are not projects that will simply be shelved due to a low current price.
While any capacity closures are to be welcomed, we shouldn’t assume they will have a major impact. As fast as old capacity is closed, new capacity is being added and if the economy slows as much as some reports suggest consumption could falter too.