As China targets 2030 for peak coal use, aluminum output could also peak

China’s steel and aluminum market is undergoing a quiet revolution.
It’s not a revolution of investment or innovation.
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Peak aluminum, steel in China?

China aluminum
Grispb/Adobe Stock

According to Reuters, Beijing’s target of peak coal use by 2030 is asserting a dampening effect on new steel mill and aluminum smelter investment.
As such, the country could be at or near peak production. As Reuters’ Andy Home notes, the country’s rising output over the years as had a dampening effect on prices. That trend has led some Western producers to cease operations.
But a combination of harsher environmental legislation resulting in Beijing dissuading investment in new coal fired power projects, combined with Western markets’ meaningful action — after years of simply complaining — to block out Chinese exports of aluminum and steel products suggests the Chinese impetus to build capacity and the rest of the world’s willingness to buy product are both going through a transformational change.

Last month, China’s surprise removal of export rebates on 146 steel items. As such, the action removed support for exporters and caught buyers on the hop. Chinese exporters either reneged on contractual prices or canceled contracts.

China’s domestic aluminum market

Demand in China’s domestic aluminium market is strong.
After being a marginal net exporter, China has been a net importer of primary aluminum since December 2019. Imports totaled over 1 million tons last year. Meanwhile, imports have risen to 486,000 tons in just the first four months of 2021. That’s good for a run rate of nearly 1.5 million tons this year.
Monthly volumes vary depending on the fluctuating arbitrage between the LME and the SHFE. However, the very presence of the arbitrage underlines the consistent strength of the domestic market.

Aluminum semis exports could see similar fate

Meanwhile, exports of semi-finished, value-add products — which had been increasing and still reached 1.66 million tons in the first four months of this year, a run rate of 5 million tons per annum — are looking vulnerable if aluminum semis go the same way as those 146 steel items and export rebates are removed.
Chinese aluminum semis are largely blocked from U.S. and E.U. markets by anti-dumping duties. However, their supply to other markets dampens global prices and satisfies demand that, historically, U.S. and European mills would have met.
In an already extremely tight market, the removal of export rebates for China’s semis would have a profound impact on prices and metal availability in the rest of the world.
Although the current SHFE premium to the LME is limiting Chinese mills’ ability to compete and is a contributing factor in the current high-priced, tight global semis market, it could be even worse.
For now, at least, the rest of the world probably needs that Chinese export supply stream. Without it, inflationary prices would rise even higher.
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