Stable Aluminum Prices: Is China Cutting Capacity?

It’s nothing new that volatility has been wild among most markets over the past few months, but that hasn’t been the case for aluminum prices.

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The metal has been trading in a very narrow price channel of $1,430–$1550 per metric ton over the past four months.

3M Aluminum LME flat since November
The three-month aluminum LME price has been flat since November. Source: MetalMiner analysis of FastMarkets data.

The combination of a slump in oil prices (a bearish factor); the sell-off in Chinese equities (another bearish factor) and a weaker dollar (a bullish factor) has led aluminum prices to trade not up, not down but just flat.

China’s Exports Fall in January

One of the main challenges facing the global aluminum industry has been rising aluminum exports. In 2015, Chinese aluminum exports rose by 10% compared to 2014. However, this year has started with a different vibe. In January, China exported 380,000 mt of aluminum, down 12% from the same month last year.

The fall in Chinese exports is positive news for global aluminum producers. However, one month doesn’t tell much of a story and certainly the aluminum industry will need exports to come down further to restore the balance in global markets. The trend in Chinese aluminum exports is a key factor to watch this year.

According to the International Aluminum Institute, China produced 2.53 million metric tons of aluminum in December 2015, up only 1% from December 2014. That is the slowest year-on-year growth in five years.

Is China Actually Cutting Capacity?

One month of production slowdown (not even a decline) doesn’t say much about whether China is cutting capacity or not. Alcoa, Inc., however is banking on cuts in Chinese capacity. The company says that 70% of aluminum smelting capacity in China is cash negative at current prices.

However, we know well that words don’t always translate into acts. China has bailed out struggling aluminum smelters before. Last year, the Aluminum Corporation of China Ltd. (Chalco) announced it would cut over 500,000 mt by October. However, analysts state that production was only cut by less than a third of what was expected as the local government subsidized the smelter.

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In the same manner, despite low prices and many being cash negative, more Chinese smelters could receive state subsides to prevent them from closing.

What This Means For Metal Buyers

Aluminum has held its value over the past few months but upside momentum is just not there. Although the latest numbers might be providing some hope for aluminum bulls, we still see other factors that could prevent prices from rising this year or even make them fall further.

Until we see real signs of a turnaround, this price stabilization doesn’t look like a bottom to us.

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