China’s aluminum supply chain trauma on the heels of the coronavirus outbreak

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A recent article by respected Reuters columnist Andy Home reports on the impact of the coronavirus, COVID-19, on the supply-demand balance in China, the world’s largest consumer and producer of aluminum, and the ramifications steps taken to contain the virus could have for the market.

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For the first time in more than a decade, demand in the global aluminum market fell slightly last year as trade wars and slowing consumption from the automotive sector dampened demand.

Even so, China’s massive primary aluminum industry continued to churn out metal and add new capacity.

According to the World Bureau of Metal Statistics, the aluminum market was in surplus to the tune of 685,000 metric tons last year, which built on a 2018 surplus of 118,000 tons.

Out of a demand total of over 62 million tons, that is a relatively small surplus. However, the fear is with downstream semi-finished product producers in China disproportionately hit by travel bans and material supply issues, consumption in China will be so badly disrupted in the first quarter that primary inventory will build up rapidly — as it did after the 2008 global financial crisis.

Surging stocks

Reuters reports exchange stocks have already surged.

SHFE inventory has surged by 224,508 tons to 409,635 tons since the start of January. Increases over the New Year holidays are the norm in China, Reuters reports, but the seasonal January-February build was a mild 75,000 tons last year and 88,000 tons in 2018.

Not only have total stocks increased, but, probably due to virus containment measures impeding transport, stocks in some areas have surged while others have fallen. Exchange arrivals have been concentrated at depots in Jiangsu and Henan provinces, with registered tonnage in Shanghai at a multiyear low of 10,218 tons.

Supply to the primary market has been similarly impeded with port stocks of bauxite rising by around 5 million tons since the start of the year as some alumina refineries struggle to secure access to stocks in port areas. Eventually, this may curtail primary aluminum production if alumina refineries run out of raw material or are not able to deliver product.

For now, there seems little to slow primary producers’ relentless production, even if primary metal is simply being stockpiled at plants.

Impact on demand

Where the article may be overestimating the impact on demand, at the retail end of the supply chain demand has certainly been hit hard in the short term.

Passenger car sales slumped by 92% in the first half of February, according to Reuters (citing the China Passenger Car Association), but movement restrictions are already being lifted across China, outside of Hubei province (the epicenter of the outbreak).

MetalMiner’s own survey of downstream manufacturers suggests downstream semi-finished product manufacturers are largely back to work, with workers at state enterprises close to 90% fully staffed and private enterprises at around 70%.

If downstream operations are rapidly returning to employment, so will other industries. If workers are going to work, they will shortly resume going to shops and car showrooms.

March is likely to remain a severely depressed month for demand and a challenging month for many producers, but the sense in China is new infection rates are slowing significantly and demand will begin to bounce back by April. Primary inventory build by then will be substantial and will likely cap any recovery in the LME price this year.

How will semis exports be impacted?

What may be of more concern is how the traumas China’s aluminum supply chain is going through will play out in exports of semi-finished products this year.

Exports were around 5.2 million tons last year, slightly down from the year before. Exporters will face even more severe headwinds in 2020 as Europe moves to impose anti-dumping duties on Chinese aluminum products by Q3 of this year.

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But if domestic demand was slower to recover than expected and possibly supported by discounted primary metal, semi-finished product producers may be tempted to regain lost revenue as exports.

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