Yesterday, Chalco officially announced that they will shut down 970kt alumina capacity to ensure the benefit maximisation, or in other words to minimise “LOSSES”. As reported before, it should include the alumina refining of Chalco Shanxi, which has annual capacity of 800kt. So how terrible is the market condition now? In my personal opinion, the environmental protection push should be essential reason.
Of course, the tumble of prices should be the direct reason. The average price of alumina had dropped by 24% from the top of this year but still with an increase of 16% y/y. Excluding the market factor, the main reason caused by the raw material-bauxite.
Since last year to now, the whole Chinese industry is experiencing the historical stringent environmental protection. For Shanxi province, we had mentioned in our blog that it is one the richest provinces in mining including bauxite and coal, and this is why it accounted for 26% of the alumina market now. But now, ore extraction is controlled by the environmental inspections and drove price up constantly. Meantime, the high inventory formed generally overwhelmed the market pulling the price down.
For alumina, by now there were two alumina refiners shut down parts of production line for ten to twenty days because of the environmental inspections. The cost to shut an alumina refinery is not as high as for a smelter, but it is still significant, so I wonder why they don’t stay shut long enough to allow the price to recover.
Furthermore, the supply-side reforming on aluminium industry has primarily finished in Shandong, Xinjiang and Inner Mongolia province, because vast majority of capacity and planned capacity is centred in these three province. But the final announcement merely sent a soft unclear message, in other words, it is that the limited expansion and current operating capacity is likely to be safe by now.
Hence, with the entire picture of the industry line, raw material up, practical strong demand and shrinking output, it is a perfect timing to shutdown to cut losses.