Articles in Category: Exports

In early 2010 when China announced it would allow the RMB to appreciate, we fielded a number of phone calls from readers curious to know what kind of percentage changes western buyers might expect. Back then we suggested the changes would come only incrementally and certainly only within single digits. Depending on where one sits, the currency still appears anywhere from 24-40 percent undervalued relative to other currencies.

But no matter, the news this week has come somewhat as a surprise as China allowed the RMB to appreciate 0.72 percent against the dollar, according to the New York Times. So the question we now ask is why have the Chinese decided to finally appreciate its currency and what will likely happen in the future.

First, a look at the currency exchange rate vis-à-vis the dollar since the beginning of 2010:

Source: Trading Economics

From our vantage point, we see three points of rationale supporting China’s move to tinker with its currency. The first rationale centers on a widening trade gap of $133.4 billion for the first half of this year versus a $119.4 billion gap during the same time last year. This gap grew “despite repeated U.S. and Chinese government pledges to bring trade into balance, according to the Reuters article (link above). The move by the Chinese, then, may signal its acknowledgment with the release of trade data that its currency policies have not gone far enough. A second rationale suggests China’s foreign exchange reserves may have placed international pressure to adjust exchange rates. China’s foreign exchange reserves grew by $350 billion during the first half of this year, according to the Times.

However, the third rationale behind the move represents the deciding factor in our opinion. The move to appreciate the RMB, at its root, centers on the need to stem runaway inflation currently reported at 6.5 percent for the month of July and according to the Times, “at the same time, China’s exporters are showing unusual strength despite economic weakness in the West. In other words, it has become both politically necessary and expedient to make the tweaks. Inflation has become untenable within China. We know this both anecdotally (our own liaison office in Shanghai requested cost of living adjustments) and quantitatively as the chart below shows:

Source: Trading Economics

The real question on our minds now involves the mid- to longer-term where will China take its currency going forward? Fearful of upsetting its export lifeline, the PRC will continue to tinker at the corners. We still don’t see any big adjustments coming anytime soon. All of this of course will add to the pressure on Washington to act on a currency reform bill still making its way through Congress. But given the state of American national politics, we wouldn’t hold our breath.

–Lisa Reisman

After reading a fair amount of provocative material on the steady, unmistakable shift in China’s society/economy (and subsequently deciding to write a series of posts on how this topic relates to the world of metals sourcing), I came across a very apt definition of “intelligence by the founder and CEO of Stratfor, George Friedman. It’s no surprise that Friedman would be writing about intelligence, seeing as how Stratfor’s raison d’etre is to provide their customers with geopolitical intelligence to aid in their decision-making whatever business they may be in.

“As a way of looking at the world and a method for collecting information, intelligence differs from journalism in many ways, Friedman wrote in a form email. “Perhaps the most important is that where journalism focuses on what has happened, intelligence also concerns itself with what will happen — and even more important, why it will happen.

Now, if this rings a bell, it should. In the paragraph above, the words “intelligence could be substituted with MetalMiner, and the result would be a sort of mission statement for our publication. In other words, while we report on what happens in the metals, manufacturing and policy worlds, we strive to add a little more a forward-looking bent that we hope (more often than not) gives our readers actionable intelligence and a different way of looking at the markets. So, it’s only fair to assume that right now, you may be asking yourself: where are you going with this?

Answer: where none of us has ever gone before. Namely, into a 21st century world not only where China is already on everyone’s radar, but also where changes in Chinese society, economy and policy may put the entire globe on an unprecedented track into the future. As nearly everything that happens in Chinese economy and government somehow touches the global metals supply chain, it seems essential to take a step back and analyze which factors in today’s changing China may have the broadest or, conversely, most acute impact.

A multitude of sources several Stratfor intelligence reports; articles from the Economist, the Boston Consulting Group and Trade Reform, among others; and data from the National Bureau of Statistics of China, not to mention countless other bureaus formed the basis of our need to explore this massive issue. And the torrent of reporting on China will only keep coming harder and stronger so how to make sense of it all?

Well, the key is to begin somewhere, and that’s what we’re going to do with this mini-series (not that we haven’t been extensively covering China already just enter “China into our search on the MetalMiner home page and it’ll quickly become evident). We’ll look in-depth at what China’s demographics, upcoming governmental shifts, economic policy changes, the import/export balance, arts and media repression and the youth movement all have to do with our metals world. Believe you me there’s plenty out there on which to base future decisions, tie in with existing business philosophy and transactions, and create worldviews.

Check back in soon for Part One.

–Taras Berezowsky

“Why don’t pro football players mow their own lawns?

Ian Fletcher puts this provocative question forth in an article for the Coalition for a Prosperous America (CPA), for which he serves as senior economist, as the centerpiece for his argument on why comparative advantage, in practice, doesn’t really work. In the first part of his argument, he lays out the difference between absolute and comparative advantage; obviously, in answering the above question, the football player has more power and ability to mow his lawn faster than a run-of-the-mill, suburban landscaping contractor but he’s got better things to do with his time.

It seems the US has had “better things to do with its time for several decades now and arguably, this has not improved our long-term growth prospects. Following our coverage of what the World Trade Organization thinks international trade will look like in 2011, Fletcher’s arguments against free trade (or, rephrased, why it is fundamentally flawed in the world we live in today) seem rather poignant; if only to draw attention to inherent problems, so that we can begin seriously considering potential solutions. “This is why we must analyze trade in terms of not absolute but comparative advantage, Fletcher writes. “If we don’t, we will never obtain a theory that accurately describes what does happen in international trade, which is a prerequisite for our arguing about what should happen”or how to make it happen.

In the second part of his argument, Fletcher lists a number of “dubious assumptions about comparative advantage working properly, poking holes in the “free trade is best argument enough holes, as he says, “to sink a container ship. He lists seven

  • “Trade is sustainable
  • “There are no externalities
  • “Productive resources move easily between industries
  • “Trade does not raise income inequality
  • “Capital is not internationally mobile
  • “Short-term efficiency causes long-term growth
  • “Trade does not induce adverse productivity growth abroad

— and although he gives a treatment for each, two stand out: trade is sustainable (it really isn’t) and “short-term efficiency causes long-term growth (comparative advantage is not built to even consider the long term). As far as the first point, let’s look no further than the trade deficit. Potential solutions to balance out the US trade deficit, which didn’t drop in February as much as analysts predicted/hoped, must stem from reducing consumption which seems paradoxical, as consuming imports is what this country has been, for better or worse, built on. (In fact, Bloomberg reported that a government report showed the cost of imported goods rose in March to a two-year high.) The percent change in the deficit that the mainstream media monitors, whether increases or decreases, all stem from Ëœsmall-potatoes’ changes (an increase in oil demand here, a decrease in the value of the dollar there, etc.), rather than systemic implementation of sustainable policy.

This is inevitably where government comes in. In a theoretical world, nations can simply trade as people would, with their own mores and assumptions and prerogatives. But inevitably, there are losers. In playing the free trade game with other nations some with governments that are involved in subsidizing elements related to trade there will surely be inequalities. But for the US to play with cheaters, it will need more than the WTO to play the referee. In addition to the pro-active government policies (across the board 33-percent tariffs on all imports, anyone?), we’ve got to look at our own consumption, break addictions not just to Ëœforeign oil’ but also to all sorts of cheaply made goods, and brace ourselves for the point in time when foreign societies will attain higher-earning, more specialized workforces much like ours.

At that point, what will the US be able to offer? Even in manufacturing, are there goods made domestically that other countries can’t make themselves or can’t buy from someone else more cheaply? How can US citizens envision a sustainable future from selling our goods, instead of buying others’? Of course, to stop short of advocating pure protectionism, there is a global trade landscape that is already in place that cannot easily be broken. But adding independent WTO-style mediation as a stopgap for unfair trade practices sometimes seem a nominal, not a real, fix.

As Fletcher mentions in yet another article, we can’t keep treating real trade problems such as the deficit as though they’re abstract. We’ve done that before with the financial securities markets, and we all saw how nebulous abstractions got the global economy into some real, real trouble.

Feel free to leave any comments/additional suggestions on how both business and government can better work together to improve the trade landscape.

–Taras Berezowsky

Source: WTO

Overall, global trade volume is up more than ever before (14.5 percent in 2010), yet World Trade Organization and other economists are warning that the rise will not be duplicated and that growth will be more modest in the year to come, as seen in the graph above. The WTO published a report that gives us a look back at the 2010 trade picture, while looking forward to what the world can expect in 2011.

From Pascal Lamy, the WTO’s director-general: “The hangover from the financial crisis is still with us. High unemployment in developed economies and sharp belt-tightening in Europe will keep fuelling protectionist pressures. WTO Members must continue to be vigilant and resist these pressures and to work toward opening markets rather than closing them.

The whipsaw effect seen in 2009-10 will be evened out over 2011, due to a number of factors in the short term, according to the report. Not considering the Japan disaster and ensuing disruptions in the trade picture, a number of issues will hamper unrestricted growth, including: rising prices of food and other primary products, including base metals; the unrest in oil-producing countries in the Middle East; and how big a role new and existing subsidies and tariffs play in keeping trade “free.

In fact, the finite quantity of commodities such as oil, food, etc. and their allocation will be more indicative of trade activity and price movements than any natural disaster.   For example, the WTO report pinpoints a study that speaks to the elusive nature of data on how natural disasters affect trade and long-term GDP (and indeed, to how rare such studies are as well):

“A recent paper by Gassebner, Keck and Teh (2010) examines data on disasters in 170 countries between 1962 and 2004. Using the methodology of this paper, we find that the expected impact of the Japanese earthquake is to:

  • reduce the volume of Japanese exports by between 0.5% and 1.6%; and
  • increase the volume of Japanese imports by between 0.4% and 1.3%.

While developed nations saw modest gains in growth, the report mentioned, “GDP grew faster in developing Asia (8.8%) than in other developing regions last year, with China and India registering strong increases of 10.3% and 9.7%, respectively. South and Central America also saw vigorous growth of 5.8%, driven by Brazil’s strong 7.5% upturn.

Indeed, those numbers indicate the growing economic power of Latin America, especially its larger role as a US trade partner; but will new FTAs be a good thing for the American economy? What role does metal trade play in all this?

(Continued in Part Two.)

–Taras Berezowsky

Commodity prices are on the rise again, even for products like oil and coal for which there is little discernible supply shortness. We wrote about the rise in thermal coal prices last month driven by demand across the emerging market but particularly in India and China.

Source: Reuters

This month China announced measures to try to reduce their import bill by boosting domestic production. At a conference last week, Reuters reported that China’s top energy official, Zhang Guobao, said China’s overall coal production is expected to increase by some 200 million tons to about 3.2 billion tons this year. At the same time, they continue to try and consolidate production to a smaller number of major players, cutting out less efficient small mines with poor safety records.

Not so fortunate is India, whose rapidly rising demand for thermal coal will increasingly need to be met by imports. The Indian economy is on track to grow 8.5% in the current fiscal year, but demand for coal is forecast to grow by 11% as the country aims to halve its peak-hour power deficit of nearly 14% over the next two years. India will no doubt be pleased to hear of any moves by China that mitigates their impact of the global seaborne coal market by boosting domestic production. The goal for India is to triple electricity generating capacity over the next decade and so Coal India, which in contrast to China’s fragmented industry accounts for nearly 80% of coal output in the country, is having to look at projects in Australia and Indonesia to maintain its domestic supply dominance. A recent IPO valued the company at $48.9bn placing it fourth in the country behind Reliance Industries, state owned oil company ONGC and State Bank of India.

The Indian state is embarking on a program of share sales to take advantage of booming commodity prices and probably to inject additional commercial skills into state sector companies. Following the successful offering of Coal India, 15 times over subscribed according to Reuters, Power Grid Corp is looking to raise $1.9bn this month followed by Manganese Ore India Ltd next month and additional shares in Hindustan Copper. The increased global investor liquidity following US quantitative easing will add support to India’s share sale program, as will firm commodity prices. Like China, major Indian state companies are gradually coming to the private market and gaining recognition as global players in their own right. Unlike China, India broadly lets their privatized companies behave like private entities rather than seek permission from the state at every turn. With solid growth and a gradually more accessible economy, India is certainly commanding a lot of attention in the resources sector with these IPOs.

–Stuart Burns

This is the second post of a two part series. You can read the first post here.

Perversely one significant difference between the UK and the US is that the UK is surprisingly still a net exporter of steel. According to the UK based Iron and Steel Statistics Bureau – ISSB the apparent consumption in the UK will be 7.9 million metric tons in 2010 although production will reach 9.3 million metric tons. The country imports about 3.7 million metric tons but exports 5.3 million metric tons. Part of the reason that UK steel production did not drop in percentage terms as much as some other countries after the financial crisis, is because imports took the hit dropping 46% while exports dropped only 30% and consumption 39%.

Although China in particular and Asia in general, is often cited as the major cause of steel trade imbalances (and of a host of other trade issues we haven’t time for here) according to the ISSB, the former Soviet states of Russia, Ukraine and Kazakhstan collectively import 3 million metric tons, internally trade just 8 million metric tons but export a whopping 49 million metric tons. What comparative advantages are these states employing? Well, I can throw in a few – low capital cost of equipment the steel mills were inherited at low cost from the Soviet state, cheap power, low labor costs, in most cases low raw material costs and low environmental costs.   In some parts of the world such as Europe these East European mills are major sources of imports and represent a considerable threat to domestic producers but so far have not figured significantly into the US with the exception of slab for Russian owned US rolling plants.

Although China is positioned below South Korea, Japan and Germany on the latest Steel Monitor Import survey, (and of course well below Canada and Mexico) that is in part due to previous trade disputes. If it were not for these Chinese imports would undoubtedly feature more prominently on the list, not necessarily because Chinese mills enjoy a comparative advantage in the Adam Smith sense, indeed the efficiency of many medium to smaller mills would compare badly with those in Europe or the US but rather because of the distortions to the free trade model we touched on above. In spite of variable efficiency and quite appalling environmental damage, Chinese steel mills have continued to expand beyond even domestic demand. The fear is that China will go too far, that rapid investment in steel production will overshoot a gradual cooling of domestic demand resulting in massive over supply and a flood of exports onto the world market.

So back to our opening section, should industrialists be worried that steel production is shrinking in countries like the UK and the US, and to varying degrees imports have become a long-term feature of the supply landscape? We have not made the case for domestic employment or environmental responsibility or any one of a number of other perfectly valid arguments in favor of domestic steel production. In our opinion one of the most basic issues is that we don’t live in a fair and open free trade world as envisaged by Adams, Ricardo, etc, we live in a trading environment heavily distorted by national interests and state manipulation. As a result, we need to encourage domestic producers across the whole range of goods and materials providing they can operate without direct state subsidy. To become totally or even majorly dependent on imports leaves our whole economy exposed to supply and cost volatility. Yes metals are commodities and as such we all face volatility but this is exacerbated many times over when an economy becomes wholly or unduly reliant on imported supplies.

–Stuart Burns

Much is written about the US Steel industry and its fall from preeminence in the latter part of the 1900’s. In the early part of the century, the US had gone through a dynamic period of growth and had already become the largest economy in the world. It produced 37% of the world’s steel and imports did not exist until well into the second half of the century. US steel production had the highest efficiency rates in the world, both due to technology and economies of scale. But the rise of competitors, largely encouraged and sponsored by the US following WWII, saw a gradual rise in imports and as the US economy matured, a comparative drop in the US share of world production.

Likewise, Britain once claimed title to largest steel producer in the world back in 1850 when world production reached 70,000 tons according to a Financial Times article. That piece quotes Britain as having two thirds of global production, but following the invention of lower cost steel production processes, massive steel growth ensued and although UK production continued to rise, the country’s share of global world production dropped to below 20% by the turn of the century as production soared to over 28mn tons. By 1934, the UK had just 10.9% of a total global production of 82.2mn tons and yet in the early 1970’s Britain still ranked 4th in the world.

As the following table shows, the UK steel industry has not had a terrible recession, falling only 20% compared to 35% in the US. Yet the long-term decline of the UK steel industry has continued and the country now sits as number 18 in the world for steel production. As in the US, this has raised serious questions about the consequences of such a decline.

The FT article mentioned above quotes Doug McWilliams Chief Executive of the Centre for Economics and Business Research, saying if Britain achieved greater success in traditional industries (such as steel), the whole economy would benefit. Economists on the other hand argue from the theoretical that steel output in isolation does not matter. To quote Philip Booth, Editorial Director at the Institute of Economic Affairs, “A developing world economy will have continual shifts in comparative advantage. There is no more reason for the UK to be a major producer of steel than a major producer of teddy bears. We suspect this argument though is based on the rather narrow principal of absolute comparative advantage; that if the UK is not the lowest cost producer of a certain product, in this case steel, then it should import steel and focus on making other products where it has an absolute comparative advantage. This is the theory first laid down by Adam Smith, although he just looked at labor as an input cost to the model (as with all economics it comes down to models) it can be expanded to look at energy, raw materials, cost of capital, environmental impact etc.

But even economists would admit that in the real world, the result of allowing free expression of comparative advantage is trade deficits with all that that entails with transfer of wealth and accumulation of currencies from one country to another, as we have seen between the US and China over the last decade. The detrimental effects are exaggerated still further if one or both parties distort the terms of trade by artificially fixing or influencing any of the inputs, such as raw material costs, labor or currency.

From the 1960’s to the 1980’s both the UK and US integrated steel making industries (BOF production method) lost their comparative advantage in steel making in part due to lack of investment in new technology and high labor costs (not to the same extent as the auto industry but relative to the global average). Rising competition from Germany, Japan and later South Korea, much of it supported and developed by the US after WWII, began to challenge US steel making supremacy internationally and following the steel crisis of the 1970’s imports began to eat into the domestic steel industry in the US just as it did in the UK. That is not to say that the whole of US steel industry was languishing in a kind of global backwater, at the same time as US Steel, Bethlehem Steel and so on were having major problems new players were developing the EAF steel making method to a new level, investing in bigger plants and improving the technology such that now they run some of, if not the most, efficient steel making facilities in the world. Coming back to Adam Smith if we had a level playing field, the US EAF producers would have a global comparative advantage, some may even have an absolute comparative advantage. The operative word of course is IF, but we will come back to that.

We will continue this series tomorrow.

–Stuart Burns

Tomorrow, the BEA will release its revised second quarter GDP numbers. Consensus has that number at 1.6%, same as the prior release. But we here at MetalMiner pay close attention to the Consumer Metric’s Institute Daily Growth Index. The chart below depicts growth (or lack thereof) based upon certain aspects of consumer spending:

Source: Consumer Metrics Institute

Following the curve, it should not come as a surprise that growth could turn negative, perhaps just before this year’s elections. But we won’t repeat previous posts on this subject. Instead, we’ll spend a few minutes examining something that Rick Davis, Founder of the Consumer Metrics Institute called out in a recent newsletter. Quite simply, Rick reminded us what comprises GDP:

GDP = private consumption + gross investment + government spending + (exports − imports)

Or in algebraic shorthand: GDP = C + I + G + (X-M)

The Consumer Metrics Institute follows all of these measures but its data comes from “upstream purchases of durable goods, or the “C in the above equation that comprises approximately 70% of total GDP. In the name of full disclosure, the Consumer Metrics Institute only tracks a portion of C. Nevertheless, we find the data of particular interest because it certainly tracks a large portion of GDP and the data leads as opposed to lags other publicly available data.

But what we will look at today involves “X-M or rather the impact of trade on GDP. And though it might appear tempting to shout hooray since the data appears “less bad than before, when imports exceed exports, we subtract from overall GDP growth.

Said differently, the equation, according to the latest available GDP data reads like this:

GDP = $10.001b + $1.589b + $2.914b + (.153b-.196b) = $14.119b

From a Pareto analysis perspective, one might conclude that the “X-M portion of the equation appears only negligible but indeed the net deficit improved GDP by $7b, or 5%. As we like to say around here, that’s better than a stick in the eye. This improvement, by the way, came from the export of goods as opposed to services. But with the consumer continuing to de-leverage and political pressure to curb G (government spending) the trade deficit becomes a more important lever in our overall economy.

For this reason, (and not protectionism) issues like currency valuation, a quintupling of exports and trade cases have become critical areas to examine.

–Lisa Reisman

It seems as though not a day goes by without a rare earth metal controversy involving China. The most recent dispute involves a Chinese fishing vessel collision with a Japanese coast guard ship, according to The Washington Post. But the dispute goes far beyond a collision between two boats it involves an island chain called Senakus (Japanese) or Diaoyu (Chinese). Geographically, the islands sit “140 kilometers east of Pengjia Islet/Agincourt, Taiwan[9]; 170 kilometers (106  mi) north of Ishigaki Island, Japan; 186  km (116  mi) northeast of Keelung, Taiwan; and 410  km (255  mi) west of Okinawa Island, according to Wikipedia. As to who has the more “valid claim on the islands remains the subject of controversy. Some think China and the Republic of China (Taiwan) have the greater claim, and others suggest Japan. Regardless, the dispute has escalated into an alleged rare earth export ban levied by China on Japan.

China has denied the allegations but others including The New York Times’ Keith Bradsher, reported the ban had gone into effect immediately.

Our own contacts in China tell a different story supporting the Chinese position that it had not issued an export ban on rare earth metals bound for Japan. One contact told us that the Japanese government has even confirmed this to be the case. So what actually happened? According to our source, over a year ago, any Chinese exporter could ship rare earths outside of government regulation (we previously reported on rare earth black markets in Japan, confirming our source’s account). By avoiding China’s resource tax, the Chinese authorities decided to crack down by increasing both the resource tax and export duty beginning last year. Now that rare earth metal prices have increased, nobody wants to pay more for the same materials.

Perhaps the most poignant comment on the subject came from Ed Richardson in this Washington Post article, “Just the reports that they might have done something like this has sent a chill through the industry. Here you have an incident over a fishing boat and this topic comes up. It’s startling.”

But is this startling? Ask anyone in China and they’ll confirm the lack of love between the Chinese and the Japanese. In fact, according to Paul Adkins, editor of Black China Blog, “Witness the protests here last week, when the Chinese fisherman got arrested by Japan.    Let me tell you the sentiment against Japan is palpable amongst the ordinary folk here. My Chinese friends do not approve of me even having a meeting or a dinner with Japanese clients.  To the extent that there is distrust towards Americans, there is much deeper hostility toward the Japanese here. Undoubtedly, the Chinese may end up “complicating” the export process with Japan. I recall my days as an aluminum trader that the wrong chop, or shipping goods to the wrong destination or other incorrect export policies would “accidentally get implemented.”

As a side bar note and perhaps ironically, China’s state owned aluminum company, Chalco, “rose by the most in a year in Shanghai trading after its parent announced a plan to invest at least 10 billion yuan ($1.5 billion) in rare earths, according to this Bloomberg/Businessweek story.

Unfortunately, this isn’t the end of the story.

–Lisa Reisman

A recent video report on the Reuters Insider service covered some interesting points regarding the aluminum market. Aluminum has moved from being in profound over-supply to balance from last year to this, so the debate that developed between David Thurtell a Citi Bank analyst and our favorite Reuters Base Metal columnist Andy Home proved rather timely.

Global aluminum annual production has dropped by about a one million ton run rate equivalent this summer largely due to the closure of Chinese smelters. The capacity cut backs are due to a number of factors but principally margin pressures on higher cost or less efficient smelters and latterly due to aggressive energy consumption targets set by Beijing for China to achieve by the end of 2010. As we saw with the mass idling of polluting industries around Beijing prior to the Olympics in 2009, Beijing can act decisively when it wants to and having staked its colors to the mast over these energy targets it will do whatever is required to be seen to achieve them even if that essentially means cheating by temporarily closing major energy consumers like aluminum smelters. Aluminum production fell to an average 111,300 tons globally in August, that’s the lowest level since March, largely on the back of a reduction to 44,800 ton daily average in China, the lowest since January.

Meanwhile consumption has continued to rise around the world, first narrowing the surplus gap and now putting the market into deficit. In David Thurtell’s opinion, the market has been in deficit for some months and he expects prices to rise as a result going toward year-end. In addition to the reduction in supply, Thurtell saw the roll out of aluminum backed ETF’s as supportive for prices and said prices could be lifted by 5-10% as a result. Andy Home was not so convinced that ETFs would have a significant effect on price arguing that in probability, every ton of aluminum that will go into the ETFs, when they finally pass regulatory approval and are formally launched already sits in the warehouses of the companies that will run the ETF’s. Or if not in their warehouse then certainly off warrant and the transfer to ETF stocks would have no impact on metal availability in the market. David Thurtell said ETF holders were typically long-term holders of metal but as Andy Home pointed out no-one has been more long-term in aluminum than the banks and traders playing the stock and finance game in aluminum over the last five years those same companies that will be the source of material for the ETFs.

When asked how supportive this was long term for aluminum prices, the two commentators took differing time frames. Thurtell said that for a country to produce more aluminum than it consumed and therefore to be a net exporter of aluminum was to be a net exporter of energy which for a country like China, a heavy importer of oil and simultaneously struggling to control pollution and carbon dioxide emissions, to export energy is senseless. As such he sees long term growth in aluminum production in China as being limited and due to dwindling energy supplies globally supportive of prices. Ever the pragmatist, Andy Home took the short view and while expressing an expectation for price increases through the end of the year and early next, felt that price increases next year would be capped by the twin dynamics driving the current capacity closures. First, Beijing’s energy targets are year-end focused and could be relaxed in the new year. Second, some of the capacity was idled due to margin pressure as cheap energy deals were curtailed earlier in the year. If aluminum prices were to rise too much, some of that capacity would become profitable again and production would rise, eating into any supply deficit.

All in all though the consensus is that fundamentals are supportive for firmer pricing in the coming months. By how much and for how long is unclear but based on Reuters discussions current prices may be the low point for the fourth quarter.

–Stuart Burns

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