One of the most popular questions we have been getting recently is, will China export more aluminium into the growing supply gap in the Rest of the World (RoW)?
It is well known that China imposes a 15% tariff on the export of raw metal, while semi-finished metal earns a refund of VAT, reducing the cost and making it more competitive in foreign markets. So the popular wisdom is that if China increases exports, it will be in semis.
And this is true. But those of you alert enough, will notice that the heading of this post does not carry a question mark.
The key to increasing exports of both raw metal and semis is … liquid metal.
Operational people will tell you that liquid metal is a great cost saving for both the smelter and its downstream customer. Instead of the smelter having to process metal through the cast house, alloying the metal, cooling it, packing and shipping it to the customer, simply send a crucible full of metal at 600° C plus to the factory. It then also save the downstream factory from the cost of reheating the metal. Provided the factory has spent some money on receiving the metal in liquid form, it saves that factory a lot of money on energy.
And liquid metal is how to export raw metal in the guise of a semi finished product. Simply pour the hot metal into a continuous caster, run the metal one pass through a rolling mill and roll it up into a coil. It is now a semi finished good, ready for export as 99.7% pure aluminium. albeit not in a 25kg form as is usually the case.
We at AZ China will be bringing more information on this to our clients and subscribers. Make sure you are on the list. Contact us at email@example.com.
In an announcement that is sure to send shivers through the petcoke trading community, China has announced a ban on the import of coal with sulphur levels above 3%.
The new rules, which come into force in January, will have a 3-tier structure of restrictions. Level 1 bans coastal cities from importing coal having sulphur levels above 1% and ash levels above 20%. Level 2 bans the transport of coal over 6ookms if the coal has a calorific value of less than 3940kCal/KG, or has sulphur exceeding 1% or ash at 20%.
Level 3 applies a total ban on any coal having ash at 40% and sulphur at 3%.
These moves are part of the government’s push against pollution. Analysts say that Australian coal is likely to be the hardest hit, because of slightly higher ash content.
But it seems to me that it is just a matter of time before similar rules are announced for the import of high sulphur petcoke. China imported just over 8 million tonnes of this category petcoke in 2013, and there had been rumours this time last year that a ban was imminent. At that time some entrepreneurs rushed out and bought inventory hoping to capitalise on the supposed ban. But the ban didn’t come, and in any case, imports of high sulphur petcoke have declined in 2014. Higher shipping costs, increased domestic supply and a sluggish economy have conspired to slow China’s appetite. Most imported HS petcoke comes from North America.
There has not been any announcement yet, so this is just an opinion of mine that a ban will come. While it seems likely in the current environment, regardless of the limited contribution such a ban would make to China’s pollution fight, we will watch for any future announcement on this.
(In Customs data, high sulphur petcoke is defined as any coke having sulphur levels above 3%. Such coke makes an important contribution to the supply of coke for anodes for the aluminium industry.)
Reuters is reporting that Mr Sun Zhaoxue, general manager of Aluminium Corp of China (Chinalco) is under investigation for “serious disciplinary violations”, a euphemism for corruption. The news comes via a notice published by the Central Committee for Disciplinary Investigation (CCDI). This is the Communist Party’s anti-corruption watchdog.
Mr Sun is also vice Chairman of the listed company Chalco, according to Reuters.
We will bring any more news on this as it comes out.
China’s import figures for bauxite and alumina illustrate one point about these markets that most commentators failed to notice or understand. In a dynamic and evolving industry, there’s not enough time to develop new supply sources.
China’s imports of bauxite so far this year are well down on 2013, with 22 million tonnes imported, for a decrease of 42%. This is to be expected, since 2013′s result was heavily loaded with stockpile material, much of it still ahead of the refineries.
This material has come from places such as Australia and India, but also Ghana, Fiji, the Dominican Republic and even Malaysia. So so far, no emerging source has elevated itself to a status anything like where Indonesia was at prior to the ban.
Meantime, China’s imports of alumina are accelerating. To the end of July, China had imported 3.2mt, for an increase of 72%. It’s a counter-intuitive result, since China has plenty of refinery capacity, which goes under-utilized when alumina is imported.
To some extent, the increase in imports was offset by a deterioration in price, with too much alumina in stock earlier this year when smelters were shutting their doors.
But those idled smelters are now restarting, and new capacity is coming on stream, and those plants and their raw materials managers can’t wait for entrepreneurs to negotiate with foreign governments and build infrastructure and establish bauxite supply routes from new sources. Those managers need the alumina now, not next year or the year after.
As a result, we at AZ China believe the level of imports of alumina will rise more strongly than we originally predicted, and the price of that alumina will also rise.
We will have more information on the supply balance in our upcoming Black China Report, due out tomorrow (Monday 15th).
Finally someone somewhere is investing in new metal units. But don’t get your hopes up.
Rio Tinto has announced that it will spend $14.8 million on improvements to its Alma smelter. This smelter, in Quebec province in Canada, is currently rated at 440,000t, and the investment will lift this by 12,000t. So in reality this is nothing more than “capacity creep”, created by tweaking the amps. The plant is of course a Pechiney design, with AP30 cells.
Alma has had a chequered history recently. The plant was at the centre of a union dispute that saw the company cut one third of production at the height of the dispute. It was also the centre of a study launched a few years ago to examine if it could be expanded to 570,000t, though nothing ever came of that study.
Alma gets its name from the town in the Lac St Jean district in northern Quebec where it is located. (Hat tip to Gordon, who corrected my original comment that it was in La Terriere.)
Here’s the latest of what we know about what happened at the Xinfa smelter. Please note, Xinfa have not released this information – we have gleaned it from our sources, so to that extent some of these points will need to be confirmed when/if Xinfa release an official report.
The accident occurred in line 1, not their new line. This line was running at 500KA, according to our information. The accident occurred at the point where the anode bar and the bus bar risers connect. The pot where the accident happened was being brought back into operation, but there appears to have been a gap between the anode bar and the circuit, and that caused a short circuit and an explosion. The accident did not happen in a control box as previously reported.
We estimate there will be a loss of about 80,000t of metal output, based on the fact that only half the 400,000tpa line was affected, and will be out of operation about 2 months.
The market impact is likely to be small. Not just because it’s only 80,000t (about how much aluminium China uses in one day), but because the plant’s customers are mostly in the south and eastern provinces, where there are plenty of other metal sources. We believe no customers will be directly impacted.
Nobody was hurt as best as we can find out.
If the accident occurred at one pot, then it begs the question, why weren’t they able to save the other pots in the line? The official post mortem will no doubt give a full explanation and corrective actions, but what we are hearing is that there were two reasons why they were not able to save the line. Quite simply, the plant had not invested in circuit breaker equipment, and the operators had had little or no training on how do save the remaining pots. Xinfa may dispute this, and we have not been able to confirm this, and anyway, any investigation will be some weeks away from reporting, but that’s what we are hearing from our sources.
We will bring any more information to you as we hear it.
Chalco recently posted its first half results and not surprisingly showed greater net losses than the same period last year. To avoid being de-listed from the exchange, Chalco last year disposed of several unprofitable assets to its parent company Chinalco, but they are unable to do the same in 2014. Therefore, a greater net loss seems inevitable given the weaker metal price.
We agree with the statement made by Chalco’s management in their interim report that the loss is mainly thanks to the low metal price. Merely looking at the primary aluminium sector, Chalco produced a total of 1.63 million tonnes in the first half, down by 19% YoY. Meanwhile the Shanghai 3-month future price declined by 10% on average which resulted in a 27% contraction of revenue and this is just in line with the reported number. Chalco management advocated that they took lots of measures to control the cost and lead to a 3% saving on producing aluminium. So far, we think the loss sounds reasonable and the retreat in volume and price is the major cause for the disappointing performance. However in contrast, Hongqiao Group gained a 28.6% increase in revenue over the same period despite gross profits dropping by 4%.
We are not accusing Chalco of being complacent in turning the company around, especially considering the increased burden of having more obligations for social stability etc. than its competitors. Rather, we are hoping that Chalco will change its mind and attempt to boost development rather than merely control the costs. Alcoa, which was also suffering losses in the primary metal sector actually set a good example for Chalco. To break away from the soft commodity market, Alcoa is moving its strategic center to high-value semi products, which are applied to aero and auto markets and have great potential for metal producers for further development. We admit 600KA technology designed by Chalco is important in cost control and energy saving, but it never provided opportunity for diversification. We would like to see Chalco take advantage of its R&D center and invest more on downstream and make determined efforts to transform its unprofitable assets to produce high-value products. Either way, there is a long way to go.
Looking ahead, we anticipate Chalco will perform better in the 2nd half, given that aluminium prices have been well above 14,250 RMB/t, in addition to the substantial government subsidies. The recovering ex-China demand will undoubtedly continue to assist London prices to go up which will further support Shanghai prices to run at a higher level than the first half of the year. The latest news about Xinfa’s accident shocked the market and will also push up aluminium prices for a while. All the fundamentals are supporting Chalco and its peers, so let us see whether Chalco can pull itself out of the mud.
In recent years, Chinese aluminum production capacity has transferred rapidly to the western region, especially to Xinjiang that has a large concentration of new production capacity. In the first seven months of this year, Xinjiang primary aluminum output was 2.275 million tons, an increase of 89.5%. Compare that with Henan province, the traditional home of aluminium production in China, where output was 1.978 million tons, an increase of 2.9%.
Xinjiang province is now the largest producer of aluminium production, relegating Henan to second place. This is the first time this change of position has occurred in the past 10 years.
Currently, the largest production areas are Xinjiang, Henan, Qinghai, Inner Mongolia, Gansu, Shandong, Ningxia, Yunnan, Shanxi and Shaanxi. The total output for these regions reached 11.7 million tons, accounting for 86 percent of China’s production.
According to sources at the Xinjiang Nonferrous Metals Industry Association, primary aluminum production capacity is expected to reach 6.0 million tons in Xinjiang by the end of 2014.
By the end of twelfth “Five-Year Plan”, Xinjiang will build 6.5 million tons of aluminium production capacity, plus semis processing capacity of 1.2 million tons. The formation of coal, electric power and metallurgy will become one industry chain, creating a value exceeding one hundred billion Yuan.
Xinjiang is set to become the new centre for aluminium in China, and by 2017 will be the largest production centre for aluminium in the world.
Meanwhile, Henan will continue to decline. Its electricity costs are more than 1,000 Yuan per ton higher than that of the western region. It will therefore be under great pressure to engage in industry transformation and upgrading, energy conservation and an Industry-wide turnaround.
We now understand that the accident at the Xinjiang Xinfa smelter occurred last Friday, although word of the accident only filtered out yesterday. We understand no one was hurt in the accident, which occurred inside the pot room, near one of the pots.
At this stage, we understand the actual impact will be not as large as first predicted. We now believe about half the line was affected, with the loss of 200kt of capacity, not 400kt as originally reported. We will continue to monitor and report.