All the Aluminum in China: How Long Can The Building Boom Last?

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Reuters reports 1.8 million metric tons of previously mothballed Chinese aluminum production capacity has now been restarted this year following a massive slump last year as prices plummeted.

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While another 2.5 mmt of new capacity, much of it ultra-low-cost, is also expected to be added by the end of the year, a process of both restarts and greenfield additions that is expected to continue into the year end. Factor in new supply from Bahrain and India, and global supply is outstripping real demand.

Distortions in the Market

The aluminum market may be distorted more than most, but copper is not far behind and steel is plagued by overcapacity running into the hundreds of millions of metric tons.

Zinc has had a strong run this year with prices rising on the back of strong (construction-supported) galvanized steel demand and a constrained supply view. But 2017 will see the return of Glencore’s 500,000 mt/year operation, previously mothballed due to low prices, significantly increasing supply.

Even the nickel market, although said to be in deficit because of Indonesia’s absence from the market and cut backs in the Philippines, has seen prices rise on the back of rising (Chinese) stainless production.

How Far Can This Stimulus Go?

Prices and production are both supported and supporting each other on the basis of strong demand and production in China across a range of metals. How much longer has China’s housing market got to run?

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How much more debt is Beijing willing to acquiesce to being added in support of maintaining an adherence to a dogmatic GDP growth target? Take your guess, but 2017 could see an easing in support and many of these markets might lose the support they have enjoyed this year. That doesn’t mean a crash, but it will mean a cap to further price increases and the possibility of prices falling back for those commodities most vulnerable to speculative support and oversupply.

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