One small step

Written by Paul Adkins

Those of you who watch China’s petcoke supply equation will know there is a small but important niche in China’s anode grade petcoke market – the small independent or “teapot” oil refineries.   Most of the almost 50 refineries are located in Shandong province.

For years this group of refineries has been lobbying Beijing to allow them to import of crude oil directly, rather than through the major importers.   And for years, Beijing has refused the request, each year allowing only 1.8 million tonnes of crude oil to be imported outside of the major import licence holders (companies like Sinopec and CNOOC import about 280 million tonnes, and growing.)

It’s an important part of the picture for those wanting to vary the blends of cokes going into anodes.   Teapot refineries often offer parcels of low sulphur anode grade coke to the domestic China market, and often at discounted prices, but the problem is, they can’t offer continuous supply.   Most of their feedstock comes from fuel oil and other sources (although we have heard of some refiners importing crude oil by giving it another name).

But that stand-off seems to have finally made some progress, although only a limited small step. Beijing has granted a licence to import crude oil to a company called Guanghui Energy. The licence allows this company to import up to 200,000 tonnes of crude oil per year.

It’s a small step because this company is based in Xinjiang, and will import the crude across the border from Kazakhstan.  The majors have resisted any attempts by the teapot refiners to import oil, so this licence may be a small step towards opening this market.  It may also be the exception, allowed for by the remote location and source of oil. Let’s hope that this is not the case, and that we will see more imports allowed for the teapot refineries, which should in turn allow anode grade petcoke supply to improve.

 

Tomago – familiar playbook

Written by Paul Adkins

Argus yesterday ran a story in their petcoke newsletter that suggested that Tomago smelter in Australia would close by 2017.

The article quotes AGL Energy’s Chief Financial Officer, Greg Redman.  AGL owns the Liddell power station, one of the generators that provides electricity to the plant. He is quoted as saying that the price rise that would come into effect at the end of the present electricity contract would be so steep that the power station. The article adds that the price rise would add $230 to the cost of making aluminium, and that this would be intolerable.

Ho hum – this reads for all the world like a direct lift from a “Power Price Negotiator’s Handbook.”

First up, a declaration of bias. Regular readers will know that I spent 4 years working at Tomago, and I reported to the guy who negotiated the power contracts (hello Ian if you are reading.)  Admittedly my information is 10 years old, but here goes.

Tomago draws power from at least 2 power stations, if I remember correctly. In fact, Tomago uses about 8% of all the electricity used in New South Wales, so it is probably AGL’s largest customer, and certainly very important to the State Government.

From memory there is more than one power contract. Certainly a new contract was drawn up when the plant converted to AP22 mid last decade, and I believe that contract runs to 2028, not 2017.

If AGL are expecting a price increase which will push the cost of making aluminium up by $230 (US$210), then AGL are being super optimistic.   I put that as somewhere above 25% increase.   I get that by doing the following calculation: Assume $28 per MWH now, and 13,500KWH/t.AL and 500,000 tonnes per year production. That gives an approximate cost of electricity at $750, so a rise of $230 is a pretty steep rise.   Readers with better knowledge of the plant’s cost structure can correct me, but if AGL achieve that sort of sire, then it’s time to buy shares in AGL.

But of course, they won’t achieve that rise, because they are already saying the plant will close rather than pay that sort of rate increase.   So what’s the point of putting out a press release that warns that your most important customer is likely to close?

Cue the State Government, former owners of the power stations, and benefactors of the wealth generated by the plant, its approximately 1000 workers and 5000 ancillary jobs.

The article says that Tomago declined to comment on the AGL statement, but I would rather hear what the State Government has to say.   Do they see through this press release?   If it was me, I would be telling AGL to get a new playbook.

 

 

 

Aurukun = “Third Time Lucky”?

Written by Paul Adkins

Bloomberg today carried a story that Glencore is working to secure the rights to the Aurukun bauxite deposit in remote north west Queensland in Australia.

It is still early days yet for Glencore, as it is still seeking to secure a mineral development licence that would allow it to explore more fully the requirements for extracting, processing and shipping the ore.

Let’s hope the word “Aurukun” means “third time lucky” in the local Aboriginal dialect.   The site has had a bumpy history.   For thirty years, the French aluminium producer Pechiney (now part of Rio Tinto Alcan) held the licence to develop the site, but never did so.   About 10 years ago, Chinalco successfully lobbied the Queensland government to take the licence off Pechiney, then finally succeeded in securing the licence for itself in about 2007.   Despite a lot of promises and some initial funding, Chinalco was not able to get anything happening, and finally gave up on the site in about 2010.

I am not sure of the quality of the bauxite, but even if it is best quality, the location leaves a lot to be desired.   The Cape York peninsula is extremely remote, and the reserves are on the “wrong” side – the western side of the cape where there are no shipping points and no deep water for vessels.   That means railing the ore to the east side of the cape, but shipping on the east side is fraught with environmental danger.   The Great Barrier Reef, a world-heritage listed site, sits off the coast of the sea ports there.   Any increase in shipping activity or the size of vessels will be decried by environmentalists, who say that the Reef is already under attack on a number of fronts.

The one thing that Aurukun has going for it is that it has a natural market 2 weeks sailing time away – China.   With world prices of bauxite set to find new higher floors thanks to bans in Indonesia and long shipping times from West Africa or the Caribbean, this gives Glencore or any other stakeholder more “wriggle room” to fund the huge costs challenges involved in developing the site.

New support at 14250, an opportunity to short?

Written by Richard Lu

Both Shanghai and London prices gained last week. The Shanghai active future contract price (AL1410) closed at 14,330 RMB/t last Friday while the London cash price also hit record highs since March 2013, at 2,058.5 USD/t last Thursday. Strong demand both inside and outside China fueled the improvement of the global aluminium industry.

The decline rate of Shanghai inventory reached over 4% last week, which firmly indicates the tightness of the China aluminium market at the moment. This may support the Shanghai price to range between 14,250 and 14,500 RMB/t this week. However, we still feel the market is overbought for the longer term.

Being one of the essential leading indicators, the HSBC flash PMI came in at 50.3 in August, which is far behind July’s final reading of 51.7. That contraction pointed out the recovery remains unstable and downside risks still remain. Along with more running capacity to inject into the market and transportation having been improved, the supply will fundamentally overwhelm the bullishness of the China aluminium market.

If the price hits 14,500 RMB/t then we feel that’s the opportunity to short, and be ready before the correction happens.

Miraculous metal

Written by Paul Adkins

I just read with interest a news story published in several websites and news outlets. The centre of the story was that Vinacomin has successfully exported 400,000t of aluminium.

Here’s the opener to the story, as it appears in the Aluminium International Today news bulletin: “The Lam Dong Aluminium-Bauxite Complex Project of the Vietnam Coal and Mineral Industries Group (Vinacomin) has exported 411,000 tonnes of aluminium since operation began in December 2013.”

That’s big news – there is no smelter in Vietnam, so it’s a miracle that they were able to fill those shipping containers with all that metal. Okay, that’s being facetious – more likely the press release that the news organisations picked up meant to refer to alumina.

There’s no doubt Vietnam is an interesting place to watch for future developments in the aluminium industry. If sufficient energy can be found there or nearby, e.g. Malaysia, then the bauxite located in Vietnam will be highly sought after, and that’s good news for Vinacomin. As it is, they are sitting next door to a very large consumer of alumina – China.

 

No Chinese aluminium made in July?

Written by Paul Adkins

The International Aluminium Institute has published its latest production figures for the world. But one number is conspicuous by its absence – China.

In the China field, there is a “ND” entry – no data.

We will publish the number when it becomes available.

But here’s a bold prediction – we think the number is going to be on the high side – or should be.   With restarts of idled capacity, plus the ramp up of new plants, the daily production number is set to break the record set last month. That was 73,400 tonnes per day, including “unreported production”.

If the July number doesn’t come in above 75,000 tonnes per day, it will mean someone else didn’t report their production figures.

(Daily production rates are the only figures worth looking at, and an annualised rate.   For a steady-state process such as aluminium smelting, monthly figures make no sense when months can very between 28 days and 31 days in length.)

 

Editor’s note: Reuters has reported that July came in at 1.98mt.   The story says this is a record, but that’s not exactly right, as March had the same production level. At 1.98mt, July is actually lower than June, on a daily basis.   

Shock, horror – Flash PMI down

Written by Paul Adkins

The HSBC Flash PMI dropped to only 50.3, compared with 51.7 the previous month. This compares with a consensus forecast of 51.5. The news sent shock waves through equities and commodity markets.

While we at AZ China did not have a prediction for this month’s PMI, and while this result is lower than many expected, it fits perfectly with the narrative that we have been espousing the last few weeks.   China’s progress towards a GDP target of 7.5% will be difficult, with many bumps and potholes along the way. it is no sure bet that China will succeed.

There’s a couple of things to note about this result:

  • It’s still  in positive, expansion territory. And it’s only the Flash number, not the final number that comes out in 10 days time.
  • It’s just one data point in a sea of data points.  The fact that the market has reacted so glumly points to how nervous people are about whether the longed-for return to heady numbers is really with us or not.
  • As we predicted, aluminium buyers entered the market too early. Whether technical traders following a trend continuation off a support line, traders looking to make a buck, or physical consumers looking to protect themselves against rising prices, the market over-reacted a few weeks ago, just as it has over-reacted this morning.

Goodbye BHPB Aluminium, hello ?

Written by Paul Adkins

BHP Billiton has announced that it intends to package its aluminium, nickel and some other assets into a new company.

In a move that has been anticipated for more than a year, BHPB said that its Chief Financial Officer Graham Kerr would be CEO of the new company, which analysts say will have a net value of about US$12 billion. But the company stopped short of naming the new entity.

This is a good move for shareholders. Aluminium assets are set to become more valuable as the metal price rises over the coming years, and the plants such as Mozal and the alumina assets in Western Australia are well run.

It may even be good news for those of you who sell to BHPB’s aluminium smelters in South Africa.   You will have a new city to visit on your global business travels.   The new company’s head office is slated to be located in Perth, Australia.   One of the prettiest cities in the world, Perth is also one of the remotest.    i am picturing folk who maybe live in New York or New Orleans, who would just love to add a stop in Perth on the run between South Africa, Brisbane and Singapore…

Why not ask?

Written by Paul Adkins

One of the things that we really enjoy here at AZ China is when clients and readers of our blogs ask us for more information.

Sometimes it’s to clarify something we have written.   Sometimes it’s a new question, and sometimes it’s an extension of our thinking.   That last one goes along the lines of “If what you say is true, then won’t this happen?” Those are the especially good questions, because they really keep us on our toes.   But we enjoy receiving all feedback, because it tells us you are reading what we write, and our efforts are not in vain.

So why not ht us up with your questions.   It doesn’t have to be related to a recent blog post or report.   If you have a question related to aluminium, carbon, anodes, petcoke, cathodes, aluminium fluoride, anthracite, alumina, bauxite, or about China, ask us.  Want to know where to get the best price for master alloys or grain refiners?   Need an alternative supplier for safety gloves?   Want to know what the aluminium price will be in the year 2020?

Email us at enquiries@az-china.com, or call the office on +86 10 5907 0270. We really do enjoy hearing from you.

Downside risks on aluminium prices

Written by Paul Adkins

Editor’s note: This piece is by Richard Lu from our office. Richard was having problems accessing the blog, so I have posted it for him.

China’s aluminium price has performed well since the beginning of May and consolidated at RMB14,000/t in recent days. However, we think the excellent performance is at or near the ceiling.  This rally of aluminium prices is due to improved domestic demand and a stronger London price, but downside risks begin to show on both sides.

Even though most economic figures pointed a positive outlook for China in the 2nd half of 2014, especially when the government re-affirmed to release more targeted easing policies, both new loans and power consumption were down in July. These indicators are part of the famous “Li Keqiang index”, after China’s Premier said he watches these indicators more than GDP. Those two numbers plus negative PPI indicates that China’s manufacturing sector remains weak. We may see huge amounts of metal come into the market in coming weeks, with near 3Mtpa restarting and new commissioning capacity on top of the current production levels. There’s not enough demand to soak up all the metal,  and this will eventually turn the price down.

Additionally, the spread between SHFE 3-month and spot narrowed to RMB15/t today. Even though it doesn’t firmly indicate a downward movement, it still reflects how tight the spot market is at the moment. Therefore, we somewhat believe the market is overbought and some funds who have the same view may begin to build short positions.

On the other hand, Euro zone economy stagnated in the 2nd quarter while the improvement in the US remained unstable. Those fundamentally prevent the rally of the London price. Besides, the high premiums further deter the enthusiasm of consumer’s buying. The improved LME price plus high premium may induce some producers to restart idled capacity outside China. The narrow spread between LME 3-month and cash prices makes the financing deal to be unprofitable. Our estimation shows a -2% return if the investors continue to do so. Therefore, some metals will be untied when the contract expired and injected into the physical market. If all the above forces lead the market back to old days when effective supply exceeds the “strong” demand, London prices will accordingly fall below US$2000/t again.

Without the support of a continually improving LME, the Shanghai price will struggle to keep at its present level. And as those who bought metal in anticipation of improved demand start to realise their bet was wrong, metal will come back into the China market and the price will fall. Maybe not in August, but certainly in the coming weeks.