Category Archives: Uncategorized

China makes its quota on everything

Written by Paul Adkins

Don’t read this post if you are eating, or if you have recently suffered a bereavement…

A local Chinese newspaper has published a story about a local government office in Guangzhou, and the lengths they go to, in order to perform their duty.

According to the newspaper report, some local officials in a town in Guangzhou had been given a target for the number of cremations to be carried out. Land is expensive and scarce, so it’s not uncommon for local governments to direct their citizens to choose cremation instead of burial for their departed loved ones (presumably only the departed loved ones, not living family or friends).

But the local citizenry were opting for burials, causing the local officials to fall behind in their quota of cremations.  These ingenious bureaucrats decided that the way to make their numbers was to buy dead bodies from surrounding townships and bring them into town for cremation.   Problem solved!

It might be a stretch, but to me this epitomises the approach in China. Numbers will be achieved, quotas will be reached, targets met. Of that there is no question. How it’s achieved is another matter.

According to the newspaper, these local officials have now been arrested.

(Hat tip to Bill Bishop and Sinocism for mentioning this story.)

Manufacturing stumbles, but doesn’t fall

Written by Paul Adkins

China’s Purchasing Manager’s Index (PMI) reading for October came in at 50.8, below September’s 51.1 but still in the expansionary zone above 50.

Most western commentators, expecting a result better than September, have called this a disappointing result.  But with coal prices down, Producer Price Index in negative and in a month shortened by a week-long holiday, it is not actually all that surprising.

It’s still true that the economy is facing some serious challenges, and even the sub-indices of new orders, export orders and inventory all suggest that growth is a battle not a cruise. But the PMI is a number derived from a survey of a relatively small number of businesses, and as a single data point, it is not all that meaningful.

To put it in practical terms, is the government or the party going to make decisions based on this indicator alone? Definitely not. Will it even register as a data point for government decisions? Unlikely – it’s not the official number, which comes out tomorrow.   That’s not to say that there are no problems in China’s economy, but the PMI is a bit like having your blood pressure monitored when you go in to hospital with a cut to your foot (speaking from personal experience here.) It’s an indirect measure at best.

 

Alcoa steps a little further away

Written by Paul Adkins

Alcoa has announced it is selling its share of the Mt Holly aluminium smelter to Century Aluminum.

Mt. Holly, in South Carolina and with output of about 229,000t, was 50.3% owned by Alcoa.

It marks another small step in Alcoa’s trajectory away from primary metal. Alcoa has closed high-cost smelters but introduced only the Ma’aden Saudi Arabia smelter, which with less than 200,000t of capacity (the other owners own the rest of the 740,000t) is less than half the capacity that had been cut. In another sign that Alcoa is re-imagining itself, the company has changed its description of itself on company documents, calling itself an engineering company.

There’s nothing wrong in that description, and it better describes a company that is focusing on its key customer segments, but the downsizing of Alcoa’s primary metal capacity leaves me wondering if they will own enough metal units to satisfy all the demand that they foresee. The transition to aluminium in the Ford F150 and in other vehicles has caused a new narrative to emerge in in the demand side, that narrative being that the transition is a major game-changer for the industry and for Alcoa in particular. I confess I have not sat down and done the numbers, to compare the demand that Alcoa predicts with its own smelting capacity, but I wonder if those who drove its share price up after the Mt Holly announcement have done so.

In a demand-driven world, the swing factor in the years ahead is going to be the delivery premium. Now sitting at 20% plus of the metal price, if all this metal demand from the auto sector is going to be filled less from Alcoa’s own plants and increasingly from metal from other producers, then Alcoa will need to make sure premiums are priced into the sales contracts every step of the way.

In that scenario, margins may suffer. If the delivery premium is passed through from the non-Alcoa source to the car company, then Alcoa’s operating margin will be a lower percentage. To illustrate, let’s say that metal is $2000, delivery premium is $400, and alloy and rolling margins are $1,000.   That’s a selling price of $3400, but Alcoa has had to pay $2400. If they supply the metal themselves, then the delivery premium in real terms reduces to only the physical cost of picking, packing and shipping. Let’s assume that’s $100. Now Alcoa’s margin on a sale at $3400 becomes $1400 instead of $1000. They also pick up the difference between the metal price and their actual cost of production, which they don’t do if they have to source metal from outside the organisation.

Of course the risk is that production costs exceed LME price, so having someone else smelt the metal makes it someone else’s problem. But that argument is hard to sustain in a world where metal is short. LME prices look set to rise over the next few years as structural shortages of metal start to change the dynamics of the market. That in turn could lead Alcoa to start dusting off idled capacity. I understand the trigger point for a decision to revive capacity is somewhere north of $2500, a price that could well be achieved, based on our modelling.

By the way, if you don’t agree with the pricing model I laid out a moment ago, please lodge a comment and tell me where I went wrong.

Harvest Season

Written by Paul Adkins

AZ China recently published its latest analysis of China’s cost of producing aluminium.

Quarter 3 2014 was a time for harvesting profits after many years of extremely difficult times. Around 60% of China’s aluminium smelters returned to the black during the quarter. However we seriously doubt if the salad days will last much longer.

It’s all laid out in our Client Briefing Note published a couple of days ago. If you didn’t receive a copy, contact us and we will send you a copy.

 

Who runs Chinalco?

Written by Paul Adkins

Don’t be under any misunderstanding about who controls China’s largest (for now) aluminium company.

The Central Organisation Department of China’s Communist Party this week announced that a politician from the Southwestern city of Chengdu has been appointed to head up the company. The Central Organisation Department is the Party’s equivalent to an HR department, and is responsible for managing career path planning for the Party’s emerging talent.

Ge Honglin has been mayor of Chengdu since 2003, before which he was involved in the steel industry in Shanghai. He therefore has no experience in aluminium. He replaces Xiong Weiping who will take up a position in SASAC, the government department responsible for managing the State’s assets.

Mr Xiong’s progression seems a lot lower in trajectory than his predecessor Xiao Yaqing. Mr Xiao left Chinalco to move into a role in the State Council and the Communist Party’s Central Committee. Perhaps Mr Xiong’s star is tarnished somewhat by the loss of 2 senior executives recently. Sun Zhaoxu was placed under investigation in September for alleged breaches of discipline, a euphemism for corruption.  Li Dongguang, a vice president of Chalco, was placed under investigation about 12 months ago.

Chinalco is a State Owned Enterprise, so it’s no surprise that the government should decide who runs it. But it also controls listed entity Chalco, in which countless investors around the world have placed their trust and funds. And for the Communist Party’s HR department to decide to put a politician with no experience in the industry in charge of the company says that heading up Chinalco is more about grooming politicians than about managing the largest aluminium company in China.

For now. Chalco has the largest smelting capacity in China at present, but more than 10% of its 4 million tonnes of capacity is idle. Meantime, Weiqiao has opened its latest smelter, taking it to about the same level of operating capacity as Chalco. Xinfa, with smelters in east and northwest China, will also have more capacity than Chalco, once it’s Xinjiang smelter reaches full capacity.

 

Marius makes way

Written by Paul Adkins

Marius Esterhuizen is departing Aluminium Bahrain.

Marius, presently Manager Strategic Supply, has been with Alba over 5 years. He will be replaced immediately by Waleed Tamimi. Marius will stay on for a while working on special projects.

Marius was previously with Sohar in Oman, which is where I first met him. Always a straight shooter, Marius has earned the respect and friendship of many in the industry. Marius still owns a house in Oman, and plans to remain in the Middle East to explore new business ventures after taking a sabbatical.

Marius doesn’t quite fit the template for people exiting, per the description I mentioned a couple of posts ago. Marius is still sporting a full head of black hair, unlike many of the rest of us grey-hairs. Nevertheless, everyone here at AZ China wishes him all the best for the future. We look forward to meeting Waleed at a future event.

 

The zoo – who’s who and who’s not.

Written by Paul Adkins

Following on from my previous post, it seems to me that there is precious little space given in our industry for keeping up with who is who and who is not.   New hires, retirements, transfers, promotions – sometimes it’s easy to miss the news that so-and-so has just left to join the opposition or that this or that person has just been promoted or booted.

If you have some news about people coming and going, please feel free to drop me an email. I will not name my sources, but of course I will also not publish anything about people going down the ladder unless it’s verified.

Here’s an easy one that most people in the carbon industry already know.  Phil Higgins of P66/Conoco Phillips fame is retiring.  I have only known Phil since 2008, which is a relatively short time given his years of experience.  Best wishes for a long and healthy retirement Phil.

I know of two other people who have left or are about to leave, but I don’t have verification on one of them and I don’t have permission from the other to reveal that he is retiring.

But if you have any news, tips, leads or press releases you want to share with the industry (I can humbly say this blog is widely read throughout the industry), please feel free to email me.

 

It’s the little things

Written by Paul Adkins

One thing about the aluminium/alumina/bauxite industry and the petcoke/anode business, they are both small worlds. This post isn’t about the metal or the carbon, but about the people.

Each year, we all have occasion to meet at various venues.   Be it TMS in February/March, the AZ China conference every 2 years, the MB conference each September, or other events, it’s always good to catch up with old friends and occasionally to make new friends. (In the carbon game, it’s frightening how many grey hairs are not being replaced with new young blood…)

This year in Abu Dhabi, I had the pleasure of meeting Ian Macintosh and his wife Leila.   They represent interests in Guinean bauxite mining, and we had a good discussion about the challenges and opportunities for investors in that country and their particular project.

But the meeting started with a small anecdote/comment from Ian about AZ China. As soon as he saw my business card, he told me he had met two AZ China staff members at a conference in May. He told me how courteous and engaging they were, and that they were a pleasure to get to know.

That little bit of feedback was powerful. Both girls remembered Ian, and pretty much said the same things about him – that he was friendly and engaging. They thought nothing of reaching out to a “lao wai” at a conference in Qingdao, and it didn’t take much effort for Ian to share the recollection with me. But those small efforts from my staff and from Ian had powerful effects – enough of an effect that Ian remembered 4 months later.  Goes to show, it’s the little things that can make a difference.

We really do have a small industry – many of the same faces year after year until they retire (two more in the carbon industry have just retired).  So it’s good not only to meet some new people, but to build relationships that stand the tests of business, making money, falling prices and cultural differences.   It makes the industry a nice place to be in.

 

 

Fly ash – everything old is new again

Written by Paul Adkins

In the previous post, I reported on the incremental progress in the development of fly ash as a source of alumina in several Chinese refineries.

Reader and former work colleague Gordon sent me an email on the weekend to let me know that in fact Alcan had been experimenting with fly ash as far back as the 1970’s.   Gordon couldn’t remember why the project finally died.

I have been searching online, and find references to laboratory trials and projects going back to the 1960’s.  In fact there is a wide range of literature detailing various programs and their outcomes all the way from the 60’s to the previous decade. In 2001, Alcan got into a spot of bother at its Lynemouth plant when local residents objected to a plan to mine and process fly ash.  Residents were worried that dust generated would affect their lives and health. (They need not have worried – the smelter closed about 10 years later, thanks to depressed aluminium prices.)

The research literature that I have seen seems to suggest that the processes envisaged last century were all too expensive – both the capital costs and the operating costs – and that the waste products were more of a problem than they were worth.

It’s hard to say whether any of this history is known to the Chinese scientists and engineers who are developing fly ash technology in China today. My guess is that it is – there has been a strong presence of Chinese at conferences such as TMS for many years, and the papers are available on the internet. Are the current trials and plants in China a progression from the work done decades ago, or are the Chinese on their own road? I can’t say, but it does suggest that the Chinese progress will take longer than perhaps their bankers would like.

A het tip to Gordon for his email.

Promises, promises

Written by Paul Adkins

One of the hot discussions in the aluminium world at present is the question of how quickly China can replace Indonesian bauxite with material from other sources.  Indonesia stopped exports in January of this year, seeking to keep the value-add inside their own country.

The Indonesians insisted that anyone who wanted their bauxite had to stump up the capital to build alumina capacity in country.   Several projects have been announced, though perhaps only 1 shows any sign of making significant progress.

Now the government of Guinea is hinting that the same rule should apply.    Keeping the value-add in their own country delivers a huge bonus to that country’s economy, as the Indonesians already worked out.

But I remain skeptical as to just how much capacity China will really build outside its own country, and here’s why.

One of the best analysts around is Lloyd O’Carroll, based in the USA.   Lloyd recently published his excellent quarterly aluminium update, and in it he reports that by the end of this year, China will have 65 million tonnes of capacity in alumina refining.   Given metal production will be around 26.5 million tonnes this year, there’s plenty of capacity available.

But here’s the rub. To the end of August (the last month for which details are available), China had imported 3 million tonnes of alumina.   That begs the question as to why it would import alumina when it has plenty of capacity, and the answer is because they have to – it takes too long to bring new bauxite sources into full flow.

But that’s not my point here. My point is, why would anyone lay down significant capital in a foreign country when you already have plenty of capacity at home?

I suspect that the promises being made are what one Australian politician called “non-core promises”. Promises that you can wiggle out of if you have to.

All of which leads me to provide you with this cartoon.

OS capacity promise