Category Archives: Uncategorized

Crumbs for the desperate

Written by Paul Adkins

Word went around today that some Chinese provinces were launching their own infrastructure-based stimulus program. As a result, the Australian Dollar rebounded sharply. The rumour said that 14 Chinese provinces are planning over USD2.4 trillion investments in infrastructure investment to stimulate the economy, starting in 2015. Shanghai base metals prices also picked up between 1% and 1.5% in today’s trading.

But as always with such announcements, one needs to be sure of the facts.  First, one has to marvel at how this huge amount is going to be funded.  The LGFV’s – Local Government Finance Vehicles – that were set up in 2009 and 2010 are now in serious financial drought.   Second, where is the national government in this?   How is it that 14 provinces can come together without HQ being involved?   How much of this program is really just other projects and plans that have previously been announced? Chinese politicians are no different to those of countless other countries when it comes to recycling announcements of projects.

The spring in the Aussie dollar, and the rise in fortunes of Shanghai prices, is a sign of how desperately markets are looking for signs of a stimulus.

China aluminium cash cost curve – better but worse

Written by Paul Adkins

AZ China’s quarterly analysis of China’s cash cost of aluminium production has been released.

In it, we show that the cost of production fell in the last quarter and through 2014.  But the cost improvement was more than wiped out by the falling metal price.

Electricity costs were the main reason for the lower costs, thanks largely to both falling coal costs and ongoing subsidies by local governments.  Interestingly, Inner Mongolia saw the best cost improvement, while Xinjiang, the province where most new smelters are being built, saw very little change.

The impact of the falling metal price was such that only 11 smelters managed to stay in the black in Q4.

If you would like to see a copy of the Q4 Cash Cost Curve Analysis, simply complete the contact form below. We will add your name to our mailing list, so you don’t miss out next time.



Written by Paul Adkins

TMS is coming up quickly.  If you are planning to be there, and you haven’t already booked a time slot with me, please contact me as soon as possible, as my calendar is filling up fast.

It’s out there

Written by Paul Adkins

Finally someone has run the story.

Today’s Australian newspaper has a story  about a possible merger between Alcoa and Rio Tinto, where the two company’s aluminium smelters would be spun off into a new company.

I first heard the rumour in November, leading me to write this cryptic post. There’s been circumstantial evidence, but no smoking gun.

  • Alcoa CFO William Oplinger told a Goldman Sachs conference last month “There’s no such thing as a core asset.” And he was quoting Alcoa President Klaus Kleinfeld. Was this a clue?
  • Alcoa is reorganising its internal structure, creating separate departments along divisional lines.
  • Rio has been making some internal changes as well. Perhaps a wise move to keep certain key people to yourself, and to make the transition to a new entity a little cleaner.

This story has been widely discussed, and it’s been a surprise that it hasn’t appeared in the press before now. I have had people from all corners talking to me about it – USA, Moscow, Sydney, London and Europe.  I decided not to run it, given the implications for shareholders and employees.

Of course, all this is not to say that it is true.   One source told me that the story doing the rounds in London was that the merger was between Rio and BHPB.

The Australian article says that Rio has said it is simply not correct.   Time will tell.  The article also says that it’s only smelters in Europe and North America, but that makes no sense, since it would leave RT holding the Australian assets that it tried to spin off just 3 years ago under the Pacific Aluminium brand.  All or nothing, surely.

The article also says it’s about countering China, but this makes even less sense. Alcoa has been positioning itself as a provider of engineering solutions, and any spare capital it has is going downstream, not into maintaining expensive smelters. Divesting itself of the burden of primary metal would free it to pursue its target markets in auto and aero. Besides, China is not a great threat to the rest of the world in the long term, despite the recent flurry of semis exports.

Would such a play help RT in the war against Glencore?   Glencore would certainly be interested in RT’s aluminium assets, primarily for the trading and premiums available. But I am not sure that spinning them off into a JV with Alcoa is enough of a defensive play, though it is probably not the only arrow in Sam Walsh’s quiver.

I am told the new entity would come pre-equipped with long-term supply contracts for alumina, and long-term sales contracts for the metal. After all, the last thing Alcoa would want to do in its exciting new world is lose supply of metal.

Here’s the transcript of the story. I can’t find a hot link to the newspaper, as I am not a subscriber, and I thank MK for sending this to me. Now that it’s out there, we will get a lot more information.


SPECULATION about the defensive manoeuvring possibilities of Rio Tinto ahead of Ivan Glasenberg’s Glencore being able to step up its takeover stalking of the mega-miner has gone in to overdrive.

A phoney war exists between the pair because under British takeover laws, Glencore is banned until April from saying anything about its ambitions after its initial approach for a “merger’’ with Rio was rejected last July. That has not stopped chatter around the next move by either party, notwithstanding the developing theme that the ambitions of the smaller and more leveraged Glencore no longer match its capability because of the severe crash in commodity prices.

The latest talk has been of a planned aluminium metal merger between Rio’s Alcan and US major Alcoa. Industry gossip has been that the pair are planning to combine their aluminium smelting assets in Europe and North America in an attempt to counter the rise of the Chinese aluminium industry, as well as blindsiding Glencore. China has come to dominate the global aluminium industry in the space of 15 years, so there is a requirement for a pushback by Western producers, so the chatter goes.

Given antitrust regulators forced the separation of the Canadian focused Alcan from its US parent Alcoa in the 1940s, there is some irony to the speculation. Such is the dominance of the Chinese industry in the lightweight metal that antitrust concerns no longer matter, or so they say.

The second theme goes directly to the stalking of Rio by Glencore, with a pre-emptive aluminium metal merger (the talk has been that bauxite and alumina operations would be excluded) seen as something of a poison pill to Glasenberg’s ambitions. Like much of the chatter around what will happen come April, the Alcan-Alcoa smelting merger is a bit of phoney war. So much so that Rio this week went beyond the standard “We don’t comment on speculation’’ to say that the rumours on the smelting merger were simply “not correct’’.

Promoters of the talk nevertheless point to Alcoa’s interest in bidding for Alcan before Rio knocked out all-comers with its over-the-top $US38 billion takeover of Alcan in 2007. Along with its Comalco aluminium interests, the Alcan acquisition propelled Rio in to the top four of the world’s biggest aluminium producers along with Chinalco (its biggest shareholder with 9.8 per cent), RUSAL and Alcoa. The Alcan acquisition was horribly timed and prompted massive writedowns since it was made.

Rio also recently planned to rid itself of the underperforming parts of the business in Australia and New Zealand through the float or trade sale of Pacific Aluminium. That fell victim to poor market appetite for the assets caused by high labour and energy costs plaguing the local operations, and weakness in metal prices. The sale was abandoned in August 2013.

The now-rejected speculation that Rio and Alcoa are planning a merger of their North American and European interests goes to the Australian/NZ operations continuing to be a slog at current metal prices. In recent Rio briefings, it has become clear the company is increasingly comfortable with its broader aluminium exposure, to the point at which it would argue that merging the smelting assets with those of Alcoa would be going backwards in terms of quality.

While the theme of the US chatter is that Alcoa alone could knock the Alcan smelters in to shape, Rio would strongly argue that a smelting combination would make no sense at all. Apart from anything else, a painful restructuring of its aluminium interests now has 80 per cent of its smelters in the first cost quartile of the global cost curve, with the remaining 20 per cent in the second quartile.

Meanwhile, Glencore is an aluminium producer itself, if not to the same scale. While Rio’s iron ore, copper, aluminium, mineral sands and coal are all of interest, the trading opportunities in aluminium metal would have particular appeal to Glencore. So it can be said that a Rio minus its aluminium smelting interests would be less appealing to Glencore with its marketing arm.

Increasingly, there are doubts Glencore will be able to return with anything meaningful come April. In a January 23 note, JPMorgan said Glencore looked to face the “most painful choices’’ of the mining heavyweights in dealing with the crash in commodity prices. It said because Glencore’s credit rating was crucial to supporting the trading business, capital expenditure cuts, assets sales and a cut in its dividend were all possible

BDI at 29 year low

Written by Paul Adkins

Reuters is reporting that the Baltic Dry Index (BDI), the main measure for dry bulk shipping, has now plunged to a level not seen since 1986.

The overall index is down to 632 points, while the Capesize index is at 725 points.   The Handysize index is at 348.   Handy size vessels are often used for cargoes such as calcined coke. Bauxite would ideally be carried in a Capesize vessel, although this size vessel is most often associated with coal and iron ore shipments.

While the lower index and therefore lower shipping costs are good news for buyers, it is a concern for the macro economic picture, especially in China.    The world’s business press has been reporting the fall in iron ore prices, but this fall to 1986 levels for the BDI is a major concern for miners and of course for the shipping companies themselves.

The only relief to this picture is that we are now rapidly approaching Chinese New Year. It is a reasonable assumption that shipping volumes will fall and stay low until we get past the middle of February. But if the BDI stays this low going into March, then we have a whole new paradigm unfolding.


Written by Paul Adkins

London-based analysts and reporters Fastmarkets Ltd are now very kindly posting some of our blog items onto their website. Be sure to keep an eye on their site, which you can find at

They are also sharing their views on the physical metal premiums, and I will post them on here from time to time.




Zoo news – Eric Johnson promoted

Written by Paul Adkins

Oxbow has issued a press release announcing the appointment of Eric Johnson to the position of President of the company.

Bill Koch remains CEO and Chairman of the Board.

According to the press release, Eric has been with Oxbow since it took over Aimcor in 2003.

Congratulations Eric!


The unmentionable

Written by Paul Adkins

Here’s a subject that even we don’t talk about very much.   SPL.

Spent Pot Lining (SPL) is the waste that comes out of the bottom of the pot at the end of its life.   A typical pot, the reduction cell in which raw aluminium is produced, can last for up to 10 years.  But eventually the carbon lining on the bottom of the pot wears away to a point where the steel bar in the bottom of the lining can be exposed.  That carbon lining, or cathode, is held in place by several layers of bricks. Once the pot dies, all that carbon and brickwork needs to be dug out and replaced.

A typical modern pot can generate about 10 tonnes of SPL.  The two portions – carbon and bricks – need very different treatments and disposition.   Any steel in the SPL can be easily removed using industrial magnets, and the bricks can be crushed and used for road-making fill or other similar uses.   But the carbon portion can contain nasty hazardous substances, including cyanide, fluorides. SPL is classed as a Dangerous Good for this reason. It is eactive with water in a way that produces inflammable, toxic and explosive gases, and can release hydrogen, methane and ammonia.

Now here’s a frightening calculation.   Based on China’s total metal production in 2014 of 27.5 million tonnes, and using a reasonable rate for tonnes per day per pot and pot life, it means that China produced something around 35-40,000 tonnes of SPL in 2014 alone.

Fortunately companies such as Australia’s Regain are bringing technology solutions to the Chinese industry, but for many companies, SPL is dealt with by burying it.   That puts the cyanide and other nasties in a position where it can leach into water supply.

China isn’t the only country where SPL is not talked about, but since China is the fastest growing and now the largest single producer of aluminium, let’s hope the industry takes a responsible, mature and enlightened approach to dealing with the waste.

2014 GDP 7.4%

Written by Paul Adkins

China’s gross domestic product expanded by 7.4% in 2014, down from 7.7% growth in 2013, but short of the Communist Party’s official target for the year of “around” 7.5%.

GDP also expanded 7.3% year-on-year in the fourth quarter of last year – unchanged from the previous quarter.

Retail sales rose 11.9% in December from a year earlier.

Fixed asset investment climbed 15.7% in 2014 compared to the previous year.

The GDP result is slightly better than the 7.3% that we expected, and it remains difficult to see how China can sustain any level above 7%.   In any case, our view remains unchanged, that a retrospective number like GDP is hardly interesting in 2015, compared with what is happening with the real challenge to China’s economy – the acceptance and management of ballooning debt, which now runs to something like 250% of GDP. The extent to which Beijing and the various provinces address this problem will set the real scene for growth in 2015 and beyond.

Probably the most remarkable feature of 2014’s GDP result is that it is the first “miss” to an important economic indicator sustained by the Communist Party since 1998.   As one journalist put it to me – the Communist Party does not miss specific targets.   Perhaps that’s why the rhetoric shifted to the target being “about 7.5%” mid year.



Goodbye 13000

Written by Paul Adkins

China’s aluminium price has breached the RMB13000 support line, and this morning was trading a little under RMB12,900.   The demand side shows little sign of stepping in with any new support, and we expect the next test line to be at around RMB12,500, with RMB12,000 the next line of support.

The only major events that will help reverse this downward spiral are for some form of intervention at a macro level by the Government, or for a major supply side reduction.   Neither are likely.   The government is not likely to take any major initiative this side of Chinese New Year, which is just 6 weeks away.   With many businesses closing for the holiday up to 2 weeks prior to the official dates, the government will not want any initiative to lose steam.   In March we will see the two annual meetings of the government, known as Liang Hui, so we may see some sort of initiative in late March.

On the supply side, there isn’t much that can cause the price to change direction.   We are presently checking with the industry to see if any of the subsidies introduced last year have expired with the new year, but so far we haven’t heard of any such action.   Certainly if governments stop the subsidies en masse then we are likely to see multiple closures and idling fairly quickly.  But the reasons why those governments introduced the subsidies have not changed – the local and regional banks that loaned money to those smelters still need their debt serviced.

Perhaps the most likely event to cause the price slide to change direction is if the price hits a “tipping point” – a price where it is so low that smelters close across the board regardless of the support they are receiving.

We did see an announcement that Henan Shenhuo is to close their remaining capacity in Henan, and will now solely rely on their Xinjiang smelter. But this was always on the cards, not only for Shenhuo but for many other companies who have built capacity in the Northwest – phase out old inefficient capacity once the new modern plants are up and running.

We may also see some new capacity held back.   We are due to see another 3.5 million tonnes enter the market this year, but some of that capacity may be delayed. That won’t change the metal price however.