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The International Aluminium Institute has published the figure for China’s December aluminium production.
December came in at 1.93 million tonnes, which is something of a surprise. With 31 days in the month, it calculates out to 62,300 tonnes per day. This is a fall of just over 4% compared with November.
For the year, the IAI numbers show China produced 21.9 million tonnes, plus another 2.4 million tonnes of “unreported production.” This is code for plants such as Hong Qiao and one or two little plants that aren’t recognised by the China Nonferrous Industry Association. Since Hong Qiao has at least 2.4 million tonnes of production, we can safely add this plus a smidgeon more, and come up with a real figure of 24.5 million tonnes.
We have not see any significant closures in the last couple of months to justify a fall of 4% last month. But it is worth remembering that the daily production rate is still or very close to record rates. December’s rate of 62,300 tpd compares with October’s rate of 62,900 and September’s rate of 61,900 tpd. In that context, November’s rate seems a little high.
But it is not uncommon for China’s monthly figures to have peaks and valleys that don’t bear any relationship to reality. The trend however is more indicative, and the recent trend has been relatively flat. That’s because although there have been some smelters in the Northwest of China complete their construction phase and start turning on the electricity, they have yet to make a significant impact on the supply number. It takes up to 12 months for a modern smelter to get to 100% efficiency.
The spectre of rampaging mid west premiums is great news for producers, who have been struggling under a low metal price for quite some time, but bad news for those who aren’t able to pass the increases on down the line. US based manufacturers had better have a pricing structure similar to those of companies like Novelis, who have a mechanism in their pricing that sees most or all the change in premium passed on to their customers.
But it isn’t just US manufacturers who will feel the pain. Those outside the US had better get ready for some pain coming soon.
With premiums fetching north of $400 per tonne, metal units in Russia, the Middle East and perhaps even South Africa will be attracted like iron to a magnet. Everyone will want to cash in on the high premiums.
But that means metal that would normally go to Taiwan, Japan, SE Asia and other markets will now not be available. Although Japan premiums are negotiated quarterly, the next round will likely be conducted in an environment where there are no spare metal units available. We could be in for a big jump in MJP premiums in Q2. The question won’t be, will a new record price be set. The question will be, how high will the new record high price be?
China’s electricity consumption reached 5.32 trillion Kwh in 2013, up 7.5% y/y, according to the National Energy Association.
Year 2013 was difficult for the aluminium industry in China. Not only the sagging metal prices, but the government published all sorts of regulations and guidelines to resolve overcapacity issues of several heavy industries, including aluminium. Yet, using IAI’s data to the end of November, and assuming December’s production is similar to November, it looks like China will finish 2013 with a production of 24.5 million tonnes, for a growth rate of 10%. Aluminium supply is growing faster than electricity supply.
According to government data, China’s aluminium industry was consuming electricity at a rate of 13,762 Kwh/T AL in 2013, down from 13,844 Kwh/T AL. If we do the maths, it means that China’s primary metal production consumed 337 billion Kwh of electricity in 2013, or about 6% of all of China’s electricity.
In fact, this ratio is down somewhat from 3-4 years ago. At the peak of the expansion of all those smelters a few years ago, China’s aluminium industry was consuming about 10% of China’s electricity. To be down 4 points when the primary metal industry has grown consistently at around 10% per year, speaks of the huge rate of growth in generation.
We will do a little research and compare China’s 6% of electricity to the rate in other countries, and give you the results in another blog post.
Matt Powell has wasted no time since his departure from Ormet. Fresh from establishing his own business, International Aluminum Solutions, Matt has formed a strategic alliance with Michael Wrotniak’s Aminco Resources.
According to the press release, Matt will join Aminco to help the latter develop “new initiatives tied to the global aluminum industry”.
Matt’s International Aluminium Solutions business remains unaffected, according to an email from Michael Wrotniak. While Matt will spend a “significant” amount of time working for Aminco, his business will be free to explore other business opportunities that do not conflict with Aminco’s interests.
Matt starts working for Aminco at the start of February, and will remain based in Ohio.
Matt and Michael will be at TMS, in case you want to meet with them.
The theme for our upcoming conference is “2020 Vision – Aluminium Outlook”, and when it comes to electricity, it’s a vital question. Where will the electricity come from?
We spend a lot of time in this blog and in our briefing notes and reports talking about the cost of electricity in China, but have you stopped to consider what the energy profile will be in 6 years time?
According to a report published in the Sinograduate website (link here), China will have 29 new nuclear power plants in operation by 2020, on top of the 20 plants it already has, for a total generating capacity of 58 GWe. According to the article, an expansion rate such as this has not been seen since the USA in the 1970s and France in the 1980s.
But what about the lessons learned from the Fukushima accident? China imposed a moratorium on development of nuclear power plants following the accident, especially inland projects. Where China will now have 41 GWe of new capacity by 2020, prior to the accident the plan had been to add 70 GWe.
Still, coal will continue to be the major source of electricity even out to the year 2020. Presently, nuclear power represents just 2% of China’s electricity profile, and even the aggressive construction planned for the rest of this decade will be matched by the construction of coal-fired capacity in the same period, leaving nuclear electricity as still only 3-4% of the total profile.
This simple chart tells the story of the China aluminium market the last 6 months. The second half of the year has killed off the forward curve, and sent the market into depression. Mid-year, the market was boosted by the idea that perhaps the idled capacity that had just been announced would leave the market short by the middle of 2014. The market expected prices to reduce slightly, but find some strength after Chinese New Year, probably in expectation that the new Government’s policies for the economy would have kicked in by then.
Now as we say goodbye to 2013, the market’s mood is quite a lot more sombre. Not only has the spot price failed to hold, but the forward curve has lost its strength. With 4 million tonnes of new capacity set to enter the market in the next 12 months, the price “curve” (it is not much of a curve any more) indicates that the market sees no bright future ahead. This is despite several pronouncements in the last couple of months from various government departments in Beijing, each with new rules, regulations and orders to dampen over-supply. As one producer said to us, the aluminium industry has pretty much given up on listening to what Beijing had to say.
Not that a low price is a bad thing. From a Communist Party perspective, a depressed metal price gives fabricators a lower input cost. And fabrication is where the employment is. From the party’s point of view, low input costs are good for urbanisation, and for the roll out of national grid, and helps in the fight to prevent inflation from rising. Indeed, there is a school of thought that says that the government protestations about over-capacity are not meant to be taken too seriously. Those bureaucrats have to write those rules and say those things, don’t they? It’s their job to write them, though not to enforce them.
It appears that high sulphur petcoke imports will be saved from a tariff in 2014. The recent list of 2014 dutiable items published by the Chinese government does not mention high sulphur petcoke.
Readers may remember that in September of this year, there was a lot of speculation that a tariff would be imposed. This was after the government published a list of commodities to be controlled due to their contribution to air pollution. We previously reported on trader’s fears of a tariff here.
With air quality a hot topic all year in China, it was a little surprising that the Government did not follow through on its threat. But it was also a little surprising that high sulphur petcoke imports made it to the list of “bad” items. China had imported 7.2 million tonnes of the material to the end of October, but this is a tiny number compared to the amount of coal and coking coal imported, and much less even than the amount of high sulphur petcoke that China’s own oil refineries produce.
The fact that no tariff has been applied does not mean that high sulphur petcoke importers are off the hook. There could still be other avenues to restricting imports. One obvious solution would be to apply a quota system, limiting the volume of coke imported by forcing importers to apply for a licence. After all, a tariff would only raise government revenue, but would do little to stop imports, which have risen 54% year-on-year.
Even though TMS is a once-per-year event, it is easy to get into the routine of things. Friday, attend the Jacobs coke conference, Saturday corporate team dinners or the Aussie night out, Sunday one of the many special events put on by good folks such as those at Koppers, Sunday night the Jacobs conference, Monday night the BP dinner and so on.
Except that if you are expecting the same again in San Diego in 2 months time, forget it. Jacobs have quietly re-scheduled their TMS reception making it available to “conference attendees and invited guests only”. Previously all you had to do was to register with them for the free nibbles and drinks, and many simply turned up on the night.
Admittedly, it must have cost Jacobs a small fortune to put on the reception, with as many as 600-700 people turning up. Assuming they got say 300 coming from their conference, that leaves them with up to another 400 freeloaders (such as myself).
That leaves open the Sunday night for many people, and a big gap in the TMS experience for a lot of folks. Although many only turned up to the Jacobs event for a quick drink before going to a client dinner, there is now no central meeting point. The Jacobs Sunday night event was often the only opportunity for people to catch up with those with whom we don’t already have a meeting scheduled.
Update – the Jacobs website shows two different dates for the industry reception. The front page summary shows it to be Saturday 15th, but when you go to register or download the agenda, it shows Sunday 16th. The first version of this blog post referred to the Saturday date. We have written to Jacobs pointing out the error.
One area of the aluminium industry that doesn’t get talked about much is, what happens to a dead pot?
In the normal scheme of things, the steel furnace in which pure aluminium is made will last somewhere between 5 and 10 years before the protective linings wear down too far. At that time, the entire shell is lifted out of its position and transported to a special workshop.
It takes a couple of days to let it cool, then another couple of days to jackhammer out what’s left in the shell so that new linings can be installed and the shell put back into the line.
But what exactly is left in a cold dead pot?
There are four main elements. There is some pure aluminium that missed being tapped out of the furnace. There is some steel – the steel bars at the bottom of the pot that act as part of the electrical circuit, and are called collector bars or cathode bars. There is the remainder of the cathode, and the various levels of refractory and protective bricks that go under the cathode.
The pure aluminium can be retrieved and recycled, and a strong magnet will pull out any pieces of steel from what the jackhammers dig up.
But that leaves you with the two worst parts – the brick portion and the carbon portion. The brick portion can be used as road fill, if you can sort it from the carbon portion. But the carbon portion contains some nasty impurities, namely arsenic, cyanide and hydrogen. These two portions, the brick and carbon pieces, are what is called Spent Pot Linings, or SPL.
In Australia, there were a variety of processes for disposing of SPL. One was a method developed by Alcoa that produced aluminium fluoride, but the operating cost and yield made it impractical for commercial use. Another method, which we used at Tomago, was to ship the SPL to a company in Italy, whom we had to pay to take it off our hands. Another way is to let the stockpile build up, in hope of someone finally coming up with a foolproof commercially viable system to treat and dispose of the SPL without upsetting the environment or the environmentalists.
But what do they do in China? They bury it.
If we take a 5-year average of total China aluminium production, and use 2.5 tons per pot per day output, we can roughly estimate the amount of SPL that China produces each year. Let’s assume for this calculation that the average metal production per year has been 20 million tons. That means 55,000t per day, so approximately 22,000 pots in operation at any one time over the last 5 years. If the average life is 5 years, then we can expect that 4,400 pots have been delined and relined per year in that time. Assuming 20t of materials per pot to come out (cathode blocks, refractory materials, collector bars, sidewalls, etc) then that means that China is generating roughly (very roughly) about 88,000t of SPL per year.
Even if I am 50% out in my calculations, that’s still 44,000t of nasty material that’s going into landfill every year.
I don’t want my local water supply getting infected by leached cyanide and arsenic. And I don’t want an explosion happening when the trapped hydrogen reacts. But that’s exactly what is happening in China.
At least in most of the rest of the world, SPL is being treated somewhat responsibly. Nobody wants to make a big deal of it, because it only reminds people of the less environmentally-friendly side of aluminium. It’s up there with the red mud ponds scattered all over the world that come about because of the bauxite-to-alumina process. Provided aluminium companies accept their responsibilities and dispose of their waste correctly, there is no problem.
But China is not part of the rest of the world.
- Chalco officially announced the resignation of its VP, Li Dongguang, who was under investigation for corruption.
- Chalco employees took part-time jobs to make a living.
- Chalco management to cut annual compensation in half unless the company can be turned around.
If you keep an eye on the aluminium industry in China, you must follow the above stories reported recently. You can imagine how tough and painful a year Chalco went through, since employees can only make a living by taking part-time jobs like washing dishes. Also notice the determination of those big bosses in Chalco to turn things around. But the reality is always cruel.
In order to avoid possible delisting, Chalco took lots of measures to regain profit. However, selling unprofitable assets to its parent company is not consistent enough to save Chalco. Comparisons between Chalco and private companies like Weiqiao and Xinfa pervasively circulate within the aluminium industry. It begs the question, why are the differences so huge.
Firstly, it is derived from the structure. Chalco possesses common characteristics of Chinese SOEs. The company is an extremely top-heavy body with a management-staff ratio of about 1:8, according to one industrial analyst. By comparison, the ratio is only about 1:50 in Weiqiao. It’s clear enough that the productivity per capita in Weiqiao is much higher than Chalco. Chalco carries more than 100,000 employees, which is a huge number, even in a low-salary country like China.
Secondly, Chalco relies too much on government bailouts. Chalco sold billions of dollars of assets to its parent company, but what will Chinalco do after taking over those bad assets? The only way to pay the bill is via the government. But in these days where the industry is no longer monopolistic, the returns available to the government are much lower, and they are likely to lose patience with Chinalco and Chalco. Chalco must leverage its unique advantages as an SOE to boost its development. For instance, winning more direct power contracts and developing upward integration by acquiring captive power plants to reduce cash cost.
Thirdly, Chalco made so many mistakes in oversea investment. It’s hard to believe they did any due diligence before they put money into other’s pockets. The most recent example is Chalco’s refining copper project in Peru. It’s said the project cost will be over the budget again. Even though it’s estimated to be profitable based on current status, the final result is still questionable. Will it be another failure, like the equity stake in Rio Tinto?
A piece of good news is that sentiment in the aluminium market is turning bullish gradually. This may offset some pressure on Chalco. But substantial reform must be carried out now.
Let’s see where Chalco will go in 2014.