China’s excess aluminum capacity and low global prices are having an impact even among state-owned aluminum producers, it would seem.
A Reuters article this week reports that Aluminum Corporation of China (Chinalco) plans to shut down it’s Liancheng smelter with a capacity of 550,000 metric tons. The plant in the northwestern province of Gansu has been losing money since at least 2011, racking up losses of $313 million making it Chinalco’s worst-performing smelter.
The smelter’s cost of production is said to average 13,860 CNY per metric ton ($2,180) in the first 8 months of the year compared to an average in China of 12,840 CNY and a best-in-class of 11,330 CNY for the lowest-cost producers. The Shanghai Futures Exchange value was around 11,100 CNY per mt today which, if Reuters is right, suggests all Chinese smelters are losing money at today’s prices.
Of the world’s 50 highest-cost smelters, 37 are in China, according to Reuters. Where the average cost of production this year will be $1,918 per mt, 14% above the average cost of the rest of the world at $1,684 per mt, the article says.
Factors Other Than Profitability
Wood Mackenzie senior analyst Uday Patel is quoted as saying that 1.5 million metric tons of annualized production were eliminated at older, inefficient Chinese smelters between January and August of this year.
Chinalco’s announcement about Liancheng could bring this to 2 mmt by year’s end but will still leave the country in surplus of between 1 and 3 mmt depending on whose data you take.
“In China, production growth and demand growth are completely divorced,” Patel is quoted as saying, noting that political factors such as the desire to keep workers employed, pressure from state governments and from the electricity suppliers feeding power to the smelters drive output decisions more than questions of profitability.
Chinese Production Still Drags Down Aluminum
Not surprisingly, HSBC in their recent Quarterly Metals & Mining Review adjusted their price forecasts for aluminum downward, essentially suggesting the metal would flatline at an average of $1,580 per mt through 2017.
Further major closure announcements could change that, not so much in the rest of the world but within China, itself. The rest of the world is technically already in deficit and is meeting that shortfall using Chinese exports and uptake of stock-and-finance trade legacy inventory. But it will take significant further Chinese closures of the order of Liancheng to have a meaningful impact on global markets.