These days in the news, there seems to be a great number of expansions in anode capacity, either Greenfield or Brownfield. Two recent projects are to serve global markets and are located in Shandong Province. We have found that more than 4 million tons of new capacity will flow into the anode market no later than 2015.
Our TMS card, which we hand out to our clients each year, states that there was more than 1 million tons of anodes exported in 2012. So far in 2013, exports have already surpassed 1 million tonnes. It’s obvious that anode capacity is in surplus in China, so it begs to ask – does China really need to add more? And if it does add more, is a doomsday imminent for the anode makers? We believe the answer is “YES”.
China’s severe overcapacity puts great downward pressure on primary aluminium prices and currently almost 2/3 of China’s smelting capacity is running at a loss. Aluminium consolidation and destocking will no doubt be implemented, otherwise it will substantially harm China’s economy. Facing potential reduced capacity or at least a slow down of smelting capacity, it makes no sense to build more anode capacities.
It makes no difference either from a smelter perspective. Xinjiang smelters are a good example, as most new capacities are starting up there. During our recent visit there, we saw that most of them are building captive anode plants. From a technical point of view, the anode butt can be easily recycled in captive plants when selling them as fuel is no longer economical. It provides alternatives for smelters and will greatly strengthen the flexibility of their operations. Moreover, captive plants can guarantee anode quality as delivered anodes can easily crack in the freezing winter. In conclusion, there just isn’t a market for those new independent anode plants.
The global market performs in a similar way to the China market. The LME hit the bottom several times in recent years and has stayed low without any sign of a rebound. Reviewing the annual average FOB price of China anodes, it dropped severely the last two years with a YoY rate of -5.2% and -2.7% in 2012 and 2013YTD respectively. Prices do not support new growth and further expanding anode capacity seems to defy logic. If new capacity continues to be built without regard to actual market dynamics, the Chinese carbon anode industry will die a slow death of depressed prices and eventually drown in their own overstock.
Join us this coming Thursday from 4.30pm Beijing time for the final Base Metals Forum for 2013 – at least the last one that AZ China will be involved in.
This week we will be looking at the recent announcement from Indonesia, as well as the broad outlook for China’s aluminium industry for 2014.
We look forward to the chat each month, and we hope you enjoy it too. We especially like the questions from the audience, because they really keep us on our toes.
If you aren’t a subscriber to the Reuters Base Metals Forum, contact Melanie Burton at Reuters.
The Indonesian government has announced that it intends to go ahead with the controversial mineral ore export ban from mid-January next year, with no transition period.
The axing of any plan for a transitionary period is one of the most important announcements in the global aluminium world this year. It had been expected that the Indonesians would allow some form of exemption, probably based on the amount of capital expended each quarter. But the announcement says that the Indonesian Government has rejected the concept of a transition. Their view is a “no pain, no gain” one – better to take the pain now, with loss of export revenue and some jobs, so that the country is better positioned to gain the huge increases in GDP by processing ores domestically.
The announcement comes just days after Rio Tinto announced the closure of the Gove alumina refinery, effectively putting an extra 8 million tonnes of bauxite into the market (but with a net zero effect, due to the loss of the alumina). The Indonesian ban and loss of any transition period will help improve Rio’s price for bauxite, and will boost the bauxite market generally.
China’s largest alumina refineries, especially those along the east coast, had already been taking precautions against the enforcement of the ban. We estimate there is as much as 30 million tonnes of bauxite being held at ports and in storage, with at least one Chinese company openly stating that they were aiming to build 12 months inventory. Those long positions now appear to have been vindicated.
But is this the last we will hear of the export ban? Some commentators have already opined that there may still be some further actions. For one thing, the Indonesian Government has effectively increased its negotiating position with those who seek to build smelters there. Any transition plan would only have led to further delays, exemptions, reviews, special cases and administrative nightmares. All that gets removed. Those who seek to export the ore must now not just show some interest, speak nice words or make initial deposits. They must now build their refineries, with no other options open. But they will also seek the support of Indonesia’s judicial system, and may seek compensation for the change in policy.
We will continue to monitor the situation, and bring you updates as they occur.
Norway’s Hydro Aluminium has announced a bold move, to reduce operating costs but increase capital spend, to position the company for a bright future.
Hydro will increase capital spend by almost 40% next year, to modernise equipment. The company says it is cautiously optimistic about the future for the light metal.
Hydro expects the global market to grow by 4-6% over the next 10 years, and this move will hep them to capitalise on that growth.
Here at AZ China, we think this is a great move and a good call. The present market is definitely slow, but the imbalance between supply and demand is not as great as it first appears. The real problem for the aluminium market is the overhang of inventory built up over the last 3-4 years. If one accepts even a more modest growth for the future than what Hydro is using, pretty soon the supply side will be short of the total metal needed.
The reason is obvious – nobody is building new plants. We will get Kitimat come back into the market, and Ma’aden, and perhaps some additional capacity from the Middle East and even Malaysia, but looking out beyond 2015 there is nothing new coming.
One needs to allow at least 3 years for a modern plant to be built, although 5 years is a safer bet. Look at Ma’aden – it commenced construction back in 2009, but it will likely be the second half of 2014 before it is running at full capacity.
So Hydro’s move is a good one, but with one caveat. If in 2015 or beyond, the world ex-China is short metal, with a corresponding metal price up around $2500 (it’s entirely possible), and if China remains long on metal supply, then it is quite possible that we could see metal flowing east to west. Quite the opposite that some commentators were predicting.
With yesterday’s announcement that the Gove alumina refinery is to close within the next few months, the regional bauxite and alumina markets are set for a bumpy ride. But let’s look at the fundamentals.
Gove contributed around 3 million tonnes of alumina, the equivalent of about 1.5 million tonnes of metal. Its markets are/were China, India and the Middle East, with a combined capacity of more than 30 million tonnes. So Gove supplied about 5% of the regional market.
Gove won’t disappear overnight. The reason why it will take 3 months or so to complete the closedown will be to honour existing sales contracts, as I understand Gove was fully sold through to the end of March. So it will be an orderly exit, and customers will have time, if they haven’t already, to shop around for other sources.
In its place, Rio Tinto will put the equivalent amount of bauxite into the market. As well, there is some expectation that RT will expand the bauxite mining to create a few extra jobs. So at least 8 million tonnes of bauxite, possibly as much as 10 million tonnes.
That is music to Chinese and Indian ears. Both countries have alumina refining capacity that could use that bauxite. China in particular will be keen to get hold of the extra bauxite, in light of the uncertainty surrounding its other sources. Indonesia is about to roll out its new export tariff regime, and West Africa is always going to be difficult for China.
The total equation of raw material supply into the primary aluminium market does not change because of Gove closing. Just the nature and point of processing shifts, from the Northern Territory in Australia to refineries in Shandong and elsewhere.
The reality is, China only imports alumina when it can’t source sufficient bauxite. A look at the two sets of import statistics will confirm this.
The winners out of this will clearly be RT, for a start. They go from losing millions per month in Gove, to making money on bauxite. And although additional bauxite entering the market should cause prices for the red dirt to soften, this bauxite enters the market just as the new Indonesia export tariff and quota system starts to bite. If Indonesia goes ahead to reduce bauxite exports, and increases the export tax, it pushes the fixed cost of bauxite up. RT will seek to equalise the price of their bauxite to that of the fixed minimum price coming out of Indonesia. Win-win for RT.
Perhaps the market will whipsaw as players adjust to the new reality. But the fundamentals do not support anything other than a shift in bauxite prices to reflect the situation in Indonesia, not the situation in the Northern Territory.
Rio Tinto today announced that it will wind down operations at the Gove alumina refinery, with the loss of about 1100 jobs.
RT expects that the refinery will close within the first 2-3 months of 2014.
The announcement comes as no surprise to anyone who has been following the protracted story since February. It could even be argued that the Northern Territory Government, the local government in Australia where the refinery is located, is to blame for the demise of the refinery, at least in part.
The NT government showed itself to be a poor negotiator throughout the process. In fact, if they hadn’t offered natural gas, then rescinded the offer and replaced it with a hybrid solution, perhaps RT would have struggled on in an attempt to return the refinery to profitability. But the NT government having raised RT’s hopes with enough gas to run the plant at a lower cost, then replaced the offer with a solution that was impractical, expensive and poorly thought through. But in the meantime, RT had its people run the calculator over each of the offers, effectively bringing the decision forward by the fact that the offer was made.
RT showed its hand when it installed its Chief Financial Officer as the head of Gove. That was a sure signal to all stakeholders that the decision was a financial one only. Any pretence that there was still hope was dashed when RT didn’t bother to respond to the NT Government’s last ditched attempt to salvage the plant. The Chief Minister of the NT government flew to meet RT executives about 2 months ago. RT’s response was to send a letter to all employees warning that closure was imminent.
The newspapers reports of the announcement quoted RT CEO Sam Walsh as saying it was a sad day. A whole town that depended directly or indirectly on one employer now has nothing but some mining to rely on. This is one of the most remote parts of Australia, with no other industry around to absorb workers. Hopefully, RT will expand the bauxite mining operations to create a few more jobs.
Many of you would have read of the explosion in Qingdao last Friday. Authorities say at least 55 people were killed in the explosion, with another 136 injured and 9 still missing.
But the explosion could parlay into problems for the aluminium industry. The pipeline ran crude oil from Qingdao to Sinopec oil refineries in Weifang and surrounding areas. Weifang is about 170 kilometres from Qingdao.
Already Jinan refinery, Qilu refinery and Qingdao refining group have decreased output 20% to 40%, in the days since the accident. Each refinery will be impacted differently, according to how much inventory they had at the time of the accident. Sinopec is reportedly talking to some of the small independent refineries in the area to provide product for Sinopec customers.
The design capacity of the pipeline is max. 10mtpy. Of course, pet coke is a waste product for refineries, so output of coke will be impacted to differing degrees. It is still too early for an official timetable of repair and restart of the pipeline, but there’s no doubt it will be brought back on line as quickly as possible, to preserve jobs in the area.
The coker capabilities of major refineries which were influenced by this incident are: Cangzhou refinery with capacity of 1.2mtpy, Jinan refinery with capacity of 1.2mtpy, Qingdao refinery with capacity of 1.6mpty, Shijiazhuang refinery with capacity of 800ktpy, Shengli oil field with capacity of 400ktpy, Qilu refinery with capacity of 2.8mtpy and Qingdao refinering Group with capacity of 2.5mtpy.
We estimate the total output of petcoke from these refineries will reduce by a combined 284kt per month. This includes anode grade coke output of 130kt and fuel grade coke output of 154kt. In a country that produces about 24 million tonnes per year of pet coke, this is a small percentage, but anode coke is already looming as a potential shortage in the new year.
We will continue to monitor the situation. Subscribers to our reports will receive more information in our next editions.
(Thanks to AZ China’s Ji Yuan for compiling this information.)
Save the date! AZ China’s 4th International Aluminium & Carbon Conference will be held in Beijing next year and we look forward to seeing each of you there!
In 2014, we will be taking the theme “2020 Vision“, and asking speakers to give us their vision of what the global aluminium industry will look like by then.
New in 2014, we will also have a strong technical stream. We will also be looking to provide our audience with more opportunities for networking, without missing out on the best papers and presentations.
As we move towards 2020, China at last seems to be slowing the frenetic pace of smelter capacity expansions. Where just a couple of years ago, we saw new smelters announced almost weekly, now we hardly see any new announcements. Instead, some capacity has been idled, mainly in the traditional heartland of China’s aluminium industry. Is this the start of a new shift towards entering the global market on an equitable basis? Can we expect to see primary metal imports grow to the volumes predicted a few years ago?
We expect a lively debate on these and other issues. We will be making more emphasis on roundtable discussions, rather than one-way PPT presentations. We also have a fun event planned that will allow you to experience Beijing like you never have before.
The 2014 conference is sponsored by:
Rio Tinto today announced that it had abandoned plans to convert the Gove alumina refinery to gas, and is now reviewing the future of the plant.
The company blamed low alumina prices, a high exchange rate and substantial operating losses at the plant for the decision. But it stressed that no final decision had yet been made.
The Gove refinery is in a remote corner of Australia, with a single town of about 4000 residents almost solely dependent on the refinery for employment. Already the Australian labour unions are calling for federal government intervention to save the refinery.
The problem for the unions and all those who want to save the refinery, is that the causes of its malaise are largely outside of any government’s ability to fix. The natural gas solution would have been a good fix for the operating losses, but would require upwards of $500 million to provide a pipeline to bring the gas to the refinery. But market variables such as the exchange rate and the price of alumina could easily swing against the refinery again.
Perhaps some jobs can be saved by Rio expanding the bauxite mining operations there, though it appears to be just a matter of time before the refinery is closed. Likely Rio will not act now, just before Christmas, but the first quarter of the new year will be another story.
The focus for base metals and aluminium will be on China in the coming years, even more so than ever before. However, as China deals with structual change in the next 5 years, growth will slow compared to previous years. Yet that growth is likely to come less from exports and more from private consumption. The expansion of private consumption-led aluminium use, such as automobiles, consumer goods and packaging, will be an interesting area to watch. Essential infrasture building blocks such as power grids and electrical cables will also see an increase in demand due to government funding of intiatives such as the National Smart Grid program. The service sector in China will also be an area to watch in the next 5 years.
Overall, is our view for the outlook of China’s aluminium industry postive or negative?
Those of you who have purchased our 5 Year Outlook for China’s Aluminium Industry report already know the answer! If you have not yet purchased this 130-page indepth report, contact us today.
The 5 Year Outlook for China’s Aluminium Industry is the most comprehensive work available on the subject. For pricing information and detailed table of contents, email email@example.com.