Category Archives: aluminium
Alcoa has carried out the first leg of its review of smelting capacity, announcing the closure of its last remaining smelter in Brazil.
The Alumar smelter was running at a rate of 74,000t after suffering previous cutbacks. This leaves Brazil with just 2 smelters producing a little over 900,000t. Brazil is already a net importer of metal, a situation which will see premiums rise further, especially in the run-up to the next Olympics.
Alcoa announced it was reviewing 500,000t of capacity with a view to moving itself down the cash cost curve. Immediately the announcement came out, analysts pointed to Brazil and Spain as two most likely candidates for curtailment.
Alcoa has 3 plants in Spain, but two of them were idled during the previous round of cuts. At that time, the idling was declared to be “partial and temporary.” The two plants have a combined capacity of about 170,000t. If those two plants move to a new status of “complete and permanent” closure, that would still leave Alcoa with about half of its 500,000t target to be found. Alcoa is starting to run out of choices in far-flung countries. Assuming the third smelter in Spain is safe, Alcoa still has Norway, Australia and Iceland as targets, but some North American plants might now be feeling the heat of the spotlight falling on them. It has been reported that Australia’s Portland smelter was not part of the review, while Norway and Iceland are relatively low cost plants, according to our data. Assuming the 500,000t target was not an arbitrary number, it does start to look like North America will be the third leg of the cuts.
(Note to Alcoa – your Alcoa Iceland web page shows it is under construction and will be ready in October 2014.)
There is a rumour doing the rounds of the China market this morning that Chalco and its sell-side consortium partners are planning to curtail some operating capacity.
No details on how much, or for how long, or which particular plants would take some pain, or when this would start, though the understanding is that Chalco wishes to cash in on the upcoming peak season for demand by throttling back some supply and forcing prices up.
Again I stress that this is just a rumour, but it certainly makes sense. When the consortium was announced almost two months ago, we said then that blaming buyers for low prices is a “head in the sand” view of the problem. The 13 companies in the consortium have only themselves to blame for pumping too much metal into the market. Where foreign producers such as Alcoa and Rusal took action by closing old inefficient plants, China had shown no signs of doing the same. So if the rumour is true it would be the right approach.
A couple of things to consider, if the rumour is true.
- The current rally in prices may in fact be due to buyers jumping in ahead of the announcement. There’s no doubt prices would pop, depending on the extent of any curtailments.
- Curtailments of smelting capacity would take the pressure off supply of anode coke. Coke prices continue to rise as supply of anode coke remains short.
- Curtailments could change the balance of local government subsidies. If a plant closes one line, will it still be eligible for a subsidy? How will those local governments react?
- A higher metal price will kill those who seek to make a buck by exporting semis. As we have reported here, China’s semis exports are in record high levels, but that business could “stop on a dime” as Americans say. There’s already a lot of pressure on this business, with lower LME prices, falling premiums and increased pressure from the Chinese government, not to mention the actions taken recently by Rusal.
- Alumina prices will fall. Don’t be long imported alumina right now.
We will bring more news on this as and when we find out more.
The International Aluminium Institute has released the production figures for February, and the numbers seem to reveal a couple of trends, but beware.
Measured on a tonnes per day basis, production for the rest of the world ex-China has risen slightly over January (1%) and by 2% compared to February 2014. But it is not a uniform move, and there are no surprises in the data. Compared to 12 months ago, South America and Africa are down, GCC is up, Western Europe is up, Australia/New Zealand is down. Simply put, GCC production increases have cancelled out the cutbacks in most other parts of the world.
What this means is that the structural shortage of new metal units is yet to reveal itself fully. A 2% rise in supply is not enough to cover demand growth RoW, but combined with legacy metal exiting finance deals and semis exports from China, the new super cycle is a long time coming. But until Alba Line 6 starts up, it’s unlikely GCC can continue growing output, meaning that a structural gap in supply will be a slow reveal.
China on the other hand presents a different picture. At first glance, China seems to have grown slightly over January, achieving 89,400 tonnes per day. But that’s not a true reflection, since the IAI loads a set 300,000t per month of unreported production. Divided by 28 days in February, that number artificially inflates the daily rate for China. Without the unreported production figure, China’s daily output was unchanged. (Unreported production is a proxy for Weiqiao, which is running at 3.6 million tonnes per year, or 300,000t per month.)
But the real news is in the comparison with 2014. February shows a growth of 20% over Feb 2014. In fact, the problem seems to be in the January numbers. January’s daily rate jumped from 70,000tpd in December to 78,700tpd. At no stage in the industry’s history have we seen so much capacity added in just one month. And February’s data, leaving out unreported production, is identical to January, despite such a jump the previous month. Quite simply, the numbers appear to be made up.
Aberrations like this tend to support our case that one should treat production data in the first 3 months with a great deal of care. January’s data appears to have been loaded or guessed, and February’s data seems to be just a repeat of January. The secondary message is, beware of analysts and commentators who proclaim that China is making too much metal, based on this data. Maybe they are, but we can’t use this data to prove it, only to prove that there some lazy bureaucrats somewhere in Beijing.
People familiar with aluminium industry unanimously agree that there should be a deficit in ex-China market in 2015, stemming from growing demand and tightened supply. The fundamentals provide a solid foundation for a price rally in LME and historically high premiums.
However, the substantial fall on both LME prices and physical premiums in recent days has shocked the market. There are many reasons causing the fall, but the increasing exports of Chinese semi-fabricated products may be the most conspicuous one among them. China’s semis exports rose by 20% in 2014 compared with 2013. It is reported that the Asian benchmark MJP premium has already stepped into descending channel as consumers can easily lock in metal supplies at a much lower price. The falling LME prices and premiums are good to consumers, but no doubt killing the producers.
Today, Reuters reported Rusal became the first producer to take action. Rusal indicates it’s now seeking help from Australian government including the Customs and Trade minister’s office to put the matter on the agenda of the next meeting of the World Customs Organization.
Such an action is necessarily a long slow process, with an uncertain outcome. Particularly uncertain is the reaction from China itself. Will the government act to tighten the rules, reduce the size of the VAT refund, or simply stonewall the complaint process? We think it is more likely the former rather than the latter course of action will be chosen. Beijing already views the low export prices as a free and unwarranted discount to foreigners.
We think the market will still be the most efficient tool to balance itself. As LME prices and premiums are falling and Chinese aluminium prices are range bound, the narrowed spread will naturally restrain the semis exports. If there’s no profit to be made, people will simply stop doing it.
China is planning to reform electricity pricing. The new electricity reform plan may be released soon after “Liang Hui” – the annual parliamentary session running in Beijing at the moment. It is reported that under the new plan, power plants will be allowed to sell electricity to large power users directly. It means power price will be determined by both market power while transmission costs will remain under oversight of the government. This move transfers risk to the power generators, a move consistent with China’s determination to reduce coal consumption. Generators will have to compete for business, forcing margins down for those provinces where power generation is surplus to demand.
This move should see the cash cost of aluminium fall, as more smelters seek better power contracts. But the move may not be as clear cut as one would first think. Previous tweaks to electricity policy over the last few years have allowed some smelters to negotiate directly with generators, so those that already have the privilege will gain nothing new. What really compounds the picture though is the subsidies on electricity cost that some provincial governments provide. Governments may well withdraw subsidies at the same rate that smelters gain price concessions, leaving the industry no better off. Time will tell.
For those who have captive power plants, the new plan will also be a benefit. Presently most smelters in this situation still have to pay a transmission fee (some don’t, for instance Xinfa and Weiqiao). Under this reform plan the transmission fee will be set by the government, not by the grid company. The government has pledged as part of the reform that it will investigate the true cost of transmission, to allow a more accurate pricing model to be deployed.
The reform sounds good to both power plants and power users, but execution is the key. In fact, electricity reform has been talked millions of times in the last 13 years, but the system doesn’t change a lot. The last major reform was in 2002, when transmission was separated from generation. The current model of 5 major generators and 2 major transmission companies has been through several iterations over the years. Cynics will point out that all the major players are cousins, all being State Owned Enterprises, so it’s just a matter of which entity takes which share of the revenue, but this move at least is pointed towards reducing dependence on coal, by making the generators work harder for their revenue.
We will report more once the new plan is released.
There’s no doubt that the action taken by the USA against China is prompted by the build up to today’s situation. The rapid rise of Chinese exports has caught everyone’s attention. But as well as defending today’s US manufacturing jobs, this action could also have the effect of protecting tomorrow’s jobs, and profits.
How? Consider this – Alcoa, Novelis and others have had a major boost to share prices and outlooks thanks to the decision by the automotive companies to switch to aluminium panels in the US SUV market. The particular kind of metal needed must have high strength, uniform properties for each panel, must be light weight and must be a certain shape and size and thickness to suit car makers’ specs. All these characteristics mean a highly customised product, which in turn means high margins for the aluminium companies. Hence their share prices have rocketed since the move was announced.
The last thing that Alcoa and the other suppliers would want therefore, is for low-cost Chinese metal to enter this market. Now, that’s not going to happen any time in the near future, as it takes a long while to gain supplier approval from the likes of Ford and GM, and it takes a lot of capital to build the annealing furnaces and other equipment to make the metal in the first place. But capital is not a problem in China, and with Chinese rolling mills reportedly running at around 50% utilisation, there’s no time like the present to start gearing up to penetrate the US auto market.
Let’s face it. Ford and GM and other car makers are not going to say no to testing Chinese or other imported metal, if it presents an opportunity to drive the price down. Even if they take years to get around to even testing the metal much less approving it, it won’t stop Ford and GM putting pressure on their suppliers to match Chinese prices.
So quite apart from what this action means for today’s market players, it could also play nicely for the big aluminium companies outside China in the future.
By the way, why am I referring to this WTO action as the elephant in the room? Because I suspect that beyond an official rebuttal of the claim, we will see little to no official discussion of it. Possibly an editorial in the China Daily renouncing American politicians, but not much else, and certainly no mention of it inside China. I suspect China’s actions will speak far louder than its words, in this case.
The USA has lodged a complaint in the WTO against China’s export subsidies. Aluminium is in the list of products named in the complaint, along with textiles, chemicals, medical products and hardware.
The process of filing a complaint in the WTO is a long one. The first step involves a “request for consultations”, and full resolution of the complaint could take years. But it’s not the only action being taken. Reuters reports that the Obama administration has also been trying to convince Congress to new legislature involving trade deals, especially in the Asia Pacific region.
If there’s one area in the aluminium space that will attract attention from both sides of this challenge, it will be the rapid increase in semis exports. 2014 saw a record 3.5 million tonnes of semis exported from China, with a portion of this metal finding its way into remelt facilities in other countries. Metal which leaves China as a semi-finished product, enters new markets as an extrusion billet or P1020 ingot once it has been remelted.
On one level, those who export from China are simply making money on the arbitrage. When you take LME prices and add the large delivery premium, the net cost can easily exceed the cost of sourcing from China. That’s a “fair enough” trade, but the point of the action taken this week is that the starting cost and the production costs are being subsidised.
The USA challenge specifically talks about manufacturing hubs inside China where government subsidies can generate as much as US$1 billion in support, according to the Reuters report. In the aluminium space, we at AZ China have been reporting for a long time that many Chinese smelters are getting no-interest loans, electricity price subsidy, forgiveness of debt, transfers of assets and other measures that keep the smelters open. These actions also have the effect of reducing the cost of the product. Although in aluminium’s case, the raw metal is then sold on an open exchange, the same subsidies, loans and supports are also supplied to the next tier of the industry. In other words, the “problem” as seen by those who have initiated the complaint, has already been created by the time the metal arrives at the shipping port.
How will China react to this challenge? It’s now approaching Chinese New Year, so no doubt some bureaucrats have just had their vacations cancelled. On an official level, China will reject the claims and will provide all sort of evidence that supports their case. They will likely also agree to the request for consultation, though such a process will be drawn out to the full extent that is allowed in WTO rules.
But the real question is, does China want to have a fight with the USA and the WTO? I think there’s too much at stake for China at this time, and although Chinese attitudes have been hardening, I doubt they will want to get into a fight. I think it is more likely that quiet indirect actions will be taken to appease the complaint. One action is that they could rescind the VAT refunds that exporters receive. That would automatically make aluminium semis 13% or 15% more expensive (the difference being whether the metal is a rolled product or an extrusion).
There are two problems with that. One is that it punishes those Chinese businessmen who have a genuine export trade business with genuine customers, and hurts their export position. The other is that such an action does not address the point made in the complaint, that subsidies and support are being given in the manufacturing sector.
The problem for us in the aluminium space is that the complain is a broad-brush one. It covers textiles, chemical products and so on. This means that it could take some time before we see what the outcome will be for aluminium, and more importantly, it is possible that the Chinese government or the WTO takes a broad-brush response.
What will this action mean for the world’s aluminium market?
Some US based producers and manufacturers will be happy to see this action taken, while others will be hurt by it. The low costs coming out of China are benefiting those producers and manufacturers who source their raw materials from China.
On a global/RoW basis, it is not likely we will see any immediate reaction, but AZ China has been warning for some time that the rush to export metals will not last, and that we should not count on a sustained growth in exports.
Aluminium prices in China rose a little last week, chiefly in response to signals that showed desperation in the market more than anything else. But what was really interesting was that for the first time, the Chalco price consortium has moved their price away from the SHFE.
As readers of our Weekly Aluminium Alert would have seen yesterday, Chalco’s “East” price closed the week at RMB13,300 while the Changjiang price (the closest equivalent) closed at RMB13,100. That RMB200 difference is the widest we have seen since the Chalco move about 3 weeks ago.
It needs to be remembered that the Chalco price is not a true “free market” price. It is set on a daily basis, and uploaded to their website at 10am each morning. It does not suffer the swings of a true exchange price such as those of the LME or Shanghai. So the fact that the price has opened out is an engineered move, not a natural market move.
It is unclear why this gap opened at this time. We are now rapidly approaching Chinese New Year, and no doubt many buyers would be closing their books by now, waiting for the holiday period to end. Perhaps Chalco sought to make some profit from those who had to make last minute purchases – like the price of roses in the last days and hours before Valentine’s Day. Perhaps Chalco discerned that it had the metal units available where SHFE did not. Perhaps the Chalco price guy was asleep at the wheel and missed what SHFE was doing.
As mentioned before in this blog, the real signals won’t start until after CNY, but it was an interesting move just the same.
As we advised yesterday, the People’s Bank of China (PBOC) announced a cut to the Reserve Requirement Ratio (RRR) yesterday. Interestingly, Feb 4 is the “Beginning of Spring” day in China’s lunar calendar. We don’t think it was a dramatic coincidence, but the implications are potentially profound. Any sign of action by the government will be good news for the commodities business.
It is interesting to note that the price of aluminium rose to as high as RMB13,300. But the rise occurred on Feb 3, the day before the announcement. Could it be that some traders caught wind of the move?
Both Changjiang and Chalco prices are quoted lower today than yesterday. We think any hope traders had of a stimulus arising from the RRR cut has been replaced by a realisation that the cash generated by this move will simply go to shore up the huge debt burden within the economy. All the over-capacity in aluminium, steel and other sectors that was built following the 2009 financial crisis was built using loans and credit. Sooner or later, someone has to pay the piper, but meantime, RRR cuts will generate some cash that banks to loan out – adding to the debt burden.
We intrinsically believe no matter what easing policies are implemented, if the structural oversupply can’t be solved, the aluminium price can hardly step into real ascending channel. But structural over-capacity cannot be solved until the debt that underpins the industry is paid or written off. The problem is paying off the debt is impossible, and writing off the debts is unacceptable.
China Hongqiao (also known as Weiqiao) is one of the most profitable companies in China’s aluminium industry. Even when aluminium prices were in the doldrums in the first half of 2014 and most of its peers were suffering losses, Hongqiao still gained more than 2 billion RMB at that period. There are several factors leading to Hongqiao’s great success, but the core competitiveness is the conspicuously low power costs.
Hongqiao generates electricity by its captive power generators and transmits through its own grid. In contrast, most other companies who also have captive power generators must transmit the electricity through national grids or at least have the national grids as backups to prevent power outage. Our research tells us that the difference between Hongqiao and other smelting companies in Shandong Province who have captive power generators is about 0.07 RMB/Kwh. Theoretically, the difference derives from the use of their own grid.
What would happen if smelters in other provinces built up their own regional networks. If regional grids were built, members connected to those networks would only pay for fuel costs and small managing costs on a cash basis. Additional costs of transmission and backup could be saved and savings would be substantial. If we conservatively assume 0.05 RMB/Kwh could be saved in Henan Province, the savings would reach over 550 RMB per tonne aluminium on average, which drives average cash cost down by 4%. Other areas like Gansu, Qinghai, and Inner Mongolia, which are rich in smelting capacity could also benefit from such networks, and the savings could range from 3.5% to 5% based on the current cash costs.
Conclusively, regional power grids could shift China’s cash cost curve entirely down by 3%. It seems an excellent deal for smelting companies, but such regional grids are obviously challenging the monopolized electricity market. However, nothing is impossible under the “New Normal”.