China infrastructure development – here we go again

Written by Paul Adkins

If there is anything which epitomises what is happening in China today, it has to be the Jing-Jin megacity plan.

The Communist Party’s core body the Politburo, has announced new grand plans to boost infrastructure development. Among the plans was a push to further enhance the merger between Beijing city and it’s neighbour 140kms away, Tianjin.

Beijing is huge, geographically.  Its ring roads are spreading to more than 90kms in diameter and are already eating into neighbouring Hebei province. But Tianjin is like the ugly stepsister.   It has been the destination for untold billions in development funds, with industrial parks the size of some large international cities, and with a central district built around the river that runs through the centre of the city.  But for mine, it’s a city whose dreams do not match the reality. It’s not a city I would ever visit unless I had to.  I could say that about several Chinese cities, but other cities aren’t pretending to be on a par with Beijing.

But for Beijing to put the merger of Beijing and Tianjin into its grand infrastructure plan speaks volumes for the grand plan.   The Jing-Jin concept is flawed and ridiculously over-dreamed.  It has been tried before and failed.

The grand plan for developing more highways, train lines, airports and other infrastructure has been tried before as well. The only thing missing from last week’s announcement was former Premier Wen Jiabao.  The Politburo has dressed up the plan in fancy robes, by announcing the New Silk Road project, a mammoth development based on the centuries-old Silk road trading route.

The jewel in the centre of the announcement was a development plan to prepare Beijing for the 2022 Winter Olympics – never mind that Beijing has not been awarded the gig yet.

To fund all this, the Politburo has little choice but to enable the central government to take on some of the debt, which according to Anne Stevenson-Yang, “at least has the virtue of making it part of the fiscal health report card”.

The outcome for the aluminium industry will be positive, as it will for steel, glass, cement and similar industries. What is not clear from last week’s announcement is, how will China’s efforts to reduce pollution be affected by this blatant move to support and promote heavy industry?  Another question we can ask is, how will making even grander plans for infrastructure projects make China’s debt burden any easier? And a third question is, what happened to the plan to allow consumer spending to become the centre of GDP growth?

We are back to 2009.

MIIT releases measures for capacity replacement

Written by Richard Lu

China’s Ministry for Industry and Information Technology (MIIT)  has released new measures for capacity replacement in the Steel, Aluminium, Cement and Glass industries.

Companies having plans to expand their capacity must eliminate identical outdated capacity. Particularly in Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang and part of Guangzhou, the eliminated capacity must exceed 1.25 times that of new capacity. MIIT will  set up a platform for the exchange of quotas to promote capacity replacement. (Our reading: companies who would like to build new capacity can buy the quota from those who have no such plans. In exchange, the seller must close its old capacity.)

In general, there is nothing new in the notification, but it gives a definition of capacity conversion.

Potlines (KA) Capacity (tonne per pot per year)
120 324
160 433
200 541
250 676
300 811
400 1093
500 1367

 

Chalco – “Who will rid me of this turbulent priest?”

Written by Paul Adkins

Let’s hope nobody in the circles of power in Beijing is up to speed on the murder of Thomas Beckett. He was murdered by followers of King Henry II, reportedly after the king cried out those immortal words in exasperation.

For surely Beijing is getting exasperated by the performance coming from one of its favorite SOE’s. Chalco has broken all Chinese records for the size of the financial loss in 2014, and its fleet of smelters are some of the worst performing in China.

Now with reports that the Chinese government is looking to amalgamate its 114 State Owned Enterprises down to as few as 40, according to some estimates, it would come as no surprise if someone didn’t take a knife, or sword, to Chalco.

But if Beijing were to decide to amalgamate Chalco with one or more of its other assets, which assets would it select?

AZ China has published a briefing note on this subject.   In the note, we examine the China aluminium smelter family owned by Beijing, and look at how they stack up to Chalco. Frankly, if the decision is definitely to find an amalgamation partner, Beijing had better be open to all sorts of left-field ideas, based on what we find in this Briefing Note.

The Client Briefing Note went out to subscribers and clients last week, but we can now make it available to a wider audience. If you would like to receive a copy of the Briefing Note, simply complete the contact form below.

How well do you know the China coke market?

Written by Paul Adkins

The world’s aluminium industry relies on China for about 20% of the coke that goes into the anodes that are consumed when making raw aluminium.  Just about every country where there is aluminium capacity buys anode grade coke (or calcined coke or anodes) from China.  Therefore it’s pretty important you know something about where that key material comes from.

So here’s a small test.

  1. Shandong province is home to a lot of oil refineries that produce anode grade coke.   But how much anode grade petcoke was produced in Shandong province in 2014?
    1. 4.6 million metric tons,
    2. 5.8
    3. 6.8
    4. 7.9
  2. How much of that coke was produced by so-called “teapot” refineries, the independent companies?
    1. 15%
    2. 35%
    3. 55%
    4. 85%
  3. China’s export data for petcoke only identifies the sulphur level. Cokes below 3% S are called low sulphur coke.  In 2014, China exported 500,000t of this material, at an average price for the year of US$215.   But was was the domestic China price for the same material?
    1. US$193
    2. US$213
    3. US$223
    4. US$243
  4. Who supplied the most calcined coke to Australia in 2014?
    1. ZCGG
    2. Lianxing
    3. Sinoway Carbon
    4. Dongya
  5. Russia achieved the lowest average price for calcined coke in 2014, at $250/t for the year. But who came second, with an average price of US$256  (ignoring small countries with volumes < 50,000t for the year)?
    1. Australia
    2. Belgium
    3. UAE
    4. India

The good news is that all the answers to these questions can be found in the Semester Pricing Handbook, our quarterly publication that goes to the very depths of the coke market.

The even better news is that anyone who can tell me the answers to at least 4 of these questions will receive the next issue of the SPH free of charge.

Here’s a form you can use to submit your answers.

Entries close Friday May 8. The next edition of the SPH is due out May 20. (You will receive a locked version, but it will be the complete file.) We will publish the answers a day or two after the 8th.

Good luck!

 

May Day!

Written by Paul Adkins

No, we are not drowning. May 1st is a Public Holiday in China, so AZ China is closed today. We will be busy dancing around the Maypole, or rallying around the workers of the world, or kicking back with a coffee and the newspaper…

We will be back on deck on Monday.

Indonesia’s efforts to get China back to the table

Written by Paul Adkins

There have been reports recently, that the Indonesian government was looking at ways to mitigate its ban on bauxite exports, in an attempt to lure capital back into alumina refinery projects. A government official in that country reportedly suggested that some form of “bauxite-for-investment” plan could be introduced, where those who show genuine progress in building refineries could be rewarded by being given permits to export, based on how much progress was being made.

Here’s what we think about that idea.

Indonesia horse

Those of you who are subscribers to our World Aluminium Monthly saw this cartoon several days ago. If you aren’t a subscriber, don’t miss out or wait days to find out what’s going on in China.

The World Aluminium Monthly is your authoritative guide to what’s happening in aluminium.  If you are interested in subscribing, simply complete this contact form, and we will do the rest.

(My thanks to our regular cartoonist Al for this, though he did actually delegate the job to his girlfriend!)

 

Zoo news – Rod dons new attire

Written by Paul Adkins

Rhodri Harries, who was the CFO for Rio Tinto Alcan, has traded in his RTA safety helmet and smelter attire for a whole new line of clothing.

Rod has joined a company called Gildan. Gildan make all sorts of clothing products, under various brand names, mostly within the “active wear” genre.

Rod had been with Alcan and then Rio Tinto Alcan since 2004. Before that he had a long stint with General Motors.  It therefore comes as no surprise that Gildan’s outgoing CFO will stay on in a mentoring role until Rod is up and running.  There’s not a whole lot of synergy between clothing and heavy industry, though at a CFO level the questions of cash flow, debt to equity ratios, and returns on shareholder funds remain the same.

It was Rod who once said to me, “I don’t care what the relativity of calcined coke is to green coke, I can only pay for it from what I earn on the LME”.  AZ China now provides a CPC to LME ratio analysis as part of our Semester Pricing Handbook.

We wish Rod all the best in his new job.

 

Bauxite imports – crazy but will get crazier

Written by June Wang

Imported bauxite volumes to China increased substantially in March to 4 million tonnes, up 47% m/m and 144% y/y. However, prices continued to fall. In March, the average price dropped to $55/t from $56/t last month, and down from $59/t at the beginning of 2015.

Nonetheless, transaction volumes still reached a new height.

Capture

As the chart shows, volumes of bauxite from Malaysia, Australia and others all presented an increase to different degree, but especially Malaysia.

In March, Malaysia shipped 1.5Mt, doubling  compared with the previous month and accounting for 33% of monthly total volumes, beaten only by Australia. Malaysia as stepped into the gap created by the export ban imposed by Indonesia in January last year. The downside for Malaysian material is that it is poorer quality, with some estimates putting it at a 40% discount to Indonesian material.

We expect April’s number from Malaysia to climb further, based on loading data, and we are hearing reports that volumes will eventually reach as much as 1.8 million tonnes per month.

Australia shipped out 1.9Mt to China in March, dominating the imported market and accounting for 42% of monthly total imports, with an increase of 17% month on month. However, the average price slipped to $57/t in March. Such fluctuations on price were mainly caused by the weaken demand of domestic alumina market. In addition, the price of India exports also dropped a little, with relatively stable volumes.

Overall,  imported bauxite to China are in a rapidly widening channel. Consumption rates are rising, but the amount of material in port inventory remained at a worrisome level.

We will be examining the situation more deeply in our monthly Black China Report, and in our World Aluminium Monthly.

 

Dangerous ratio

Written by Paul Adkins

How many commodities can you name, where one country is both the majority global producer and the majority global consumer?   Copper, nickel, gold, grains, crude oil, iron ore – all fail that test. (Retsina and Greece don’t qualify, as Retsina is not a commodity!)

Aluminium does qualify as possibly the only major commodity where the world’s supply is dominated by one country just as the world’s demand is also ruled by China.  China produces about 53% of the world’s aluminium now, and that percentage is growing. Meantime, China also consumes a little over 50% of the world’s aluminium.

Now let’s fast forward 5 years, to the year 2020.   By then China will represent about 60% of the world’s supply of the light metal, while demand will be running to similar levels.

My question is, what happens to the normal demand-supply equations in such a scenario?   What happens to price, and delivery premiums?  Worse still, what happens if one of those two numbers disconnects from the other?

In a world where China is the swing supplier, filling the gap between fresh production from RoW smelters and total RoW demand, the last thing we need is for that balance to get out of kilter.  Presently China has plenty of capacity, well in excess of demand, but there are two important facts to consider about this:

  • China’s annual demand is growing at roughly double that of the rest of the world.
  • There have been almost no new smelter projects announced in China in well over 2 years.

Those of you who subscribe to our Pipeline Report (previously known as the Births, Deaths and Marriages report) will know that although there is still a lot of new capacity due for completion in 2015, after 2016 the numbers fall away dramatically. What we are seeing now is the completion of projects started back in 2011 and 2012.   Only one or two projects are slated to continue past 2016.

In other words, by 2020 China’s supply-demand balance could also be short.

If in the next decade we find ourselves relying on China to supply more and more metal (by then we will have exhausted the legacy/finance metal supply, and all idled plants will be back on duty), then we are in for a tough time if China is short.   If at that time China decides that exports are a bad idea because they need the metal themselves, then LME prices will be much higher, as will premiums.   Conversely, if China suffers an economic hard landing and demand falls off a cliff, then metal will flood the RoW market, sending prices and premiums crashing.

Any scenario outside a “roughly even” balance in China with perhaps a little supply overhang to provide metal into the world, would be a nightmare.  When 60% of the world’s supply is in the hands of one country, it’s a strategically dangerous position to be in, and is only mitigated by the fact that Chinese demand is almost equal that. But there’s no law says that the two numbers must stay in balance.

The rest of the world needs new smelters.   We are getting some – Jharsuguda II, Kitimat, Alba Line 6, perhaps Ma’aden Phase II, even Iran (see my post from Monday), but it’s not enough.   RoW demand is set to grow strongly, thanks to the uptake of aluminium by the US auto industry, among other moves.

It’s not that in the next decade the share prices of companies such as Hydro or Alcoa will be great investments. They could be terrible investments if the China balance tips in the wrong direction.  It is simply that we shouldn’t allow ourselves as an industry and as a global community to get into this situation in the first place.  No procurement manager worth his salt would allow himself to be reliant on one supplier for a key material.

This is not an attack on China. It doesn’t matter who the dominant country is, though in this case we would be relying on a country whose political system is very different.   Compare with OPEC, which is dominated by a number of countries whose background is in Islam and whose governments are sometimes based on family hierarchies. But while OPEC countries have been dominant in supply of crude, they have never been big consumers of crude.

If we are going to keep some sort of balance of supply, the world ex-China must start building new metal capacity this side of the year 2020.

(My thanks to Hardrock 48, who first shared this thought with me.)

China’s export tariff – staying? Going? Does it matter?

Written by Paul Adkins

We here at AZ China have received several emails from clients and subscribers worried about the 15% export tariff on unalloyed raw aluminium.   Following last week’s announcement that China would eliminate the tariff on a small number of aluminium products, it seems a valid question.   If they can remove the tariff for these items, surely they can do the same across the board?

Let’s start with the facts.   Last week’s announcement was to fix an anomaly, removing 5%-10% tariff on some “loophole” items.  My reading of the move tells me that this was the only agenda at work.   Tariffs are usually tweaked twice a year, though this adjustment had a start date of May 1, not July 1 as usual, which makes it look even more like it was to fix an anomaly.

Second, the question of removing the tariff was raised and defeated last year.   Our inside sources tell us that Chalco raised the idea with Beijing in August.   The government sought comment from industry, and that response was along the lines of “If you remove the tariff, you are helping the very industry you are trying to control.”  The idea was eventually rejected, although Chalco ran a very strong lobbying campaign until December.  Even when they were beaten, Chalco’s response was, “maybe the tariff will be removed in the next tariff review, in 6 months.”

The third fact is, none of us know what might happen in the future. We at AZ China have no special scoop on tariffs, so the next bit is conjecture.

If China were to remove the tariff, would they do so without taking some sort of action regarding the export of semis?  There’s at least 1.2 million tonnes of “fake semis” on an annual basis leaving China, plus double that of genuine exports. Allow raw metal exports while not addressing semis would be tantamount to declaring war on the RoW aluminium market.

Besides that, it would also say that China no longer cares about energy as a scarce resource, and no longer cares about capturing the value-add.  The original purpose of the tariff was two-fold, to prevent the wholesale export of energy, and to keep the value-add inside the country. Relatively speaking, raw aluminium doesn’t soak up much in labour, whereas as soon as you start working the metal, you create a labour-intensive activity.

But let’s suppose China removed the 15% tariff on raw aluminium.   Such metal is raw from the smelter, unalloyed and in ingot or T-Bar or Sow form.   It is not a semi-finished product.  Metal leaving China in raw form would have to compete with smelters in Australia, the Middle East and elsewhere for new markets, not for semi-finished markets (although some customers may be able to cross over).  The average cost of production in China is higher than in other parts of the world, even after accounting for the electricity price subsidy offered by some local governments in China.  Buyers of raw aluminium need certificates of origin and tight specifications and strict control of variations from bundle to bundle, and Chinese raw metal would have to establish these credentials before they could take a serious foothold. Remember, much of the new metal coming into the Chinese market is not even registered with Shanghai, much less with LME, so it would only sell in secondary markets.

I mentioned the government subsidies just now. How long do you think it would take for an action to be taken with the WTO on the basis that metal exported from China had an unfair advantage because of those subsidies?   Already some folk are working on anti-dumping actions relating to the semis exports.

Probably the only reason why Beijing would consider removing the tariff is the same reason why we think they may not act on the semis.   Allowing metal to flow out of the country would help clear the market and would boost prices.  It’s the inverse of limiting semis exports – how would China’s domestic market possibly soak up all that additional metal, and what would happen to metal prices and company profits?

It would be a desperate move quite frankly, and one which would be problematic, would go against policy and would be short-lived, although the market would probably react extremely violently if it did happen.

We will see. Beijing will do what they consider is right for the Communist Party and for China, in that order, and with no other consideration.