Category Archives: aluminium
China’s aluminium industry has become embroiled in a fight between a smelter and a newspaper.
The Beijing News published a report on Saturday claiming that pollution emanating from an aluminium smelter in Hunan province was affecting the lives of the local residents. But the smelter has hit back, refuting the claims.
The Beijing News reported that more than 10 people have come down with cancer caused by fluoride emissions from the Chuangyuan Aluminium Co in Taoyuan county in Hunan. The report also suggested that crops were failing because of the failure to control solid waste escaping the plant. Pictures showed red-colored water seeping through solid waste. Oranges grown in surrounding areas were also affected, with some fruits appearing in strangely green colours, according to the paper.
But the smelter has published a statement on its website denying the charges. Chengtong Group, owners of the smelter, assert that the plant meets all waste gas and water limits, and that the plant has done nothing wrong. The announcement goes on to reserve the right to litigate against the newspaper.
The smelter runs at 240KA and has an annual output of 330,000tpa, and has its own captive power plant.
The local environmental protection department has now sent a team of inspectors to investigate the claims and counter-claims.
Update: More photos of the alleged offending smelter have been published today. But this photo below is of a power station, not an aluminium smelter. That’s not to say that power stations can’t create pollution, but if the residents are complaining about fluoride emissions, then those emissions are not coming from the stacks shown in this photo. More likely, the photographer didn’t know what to photograph, and has probably never seen an aluminium smelter before. But it shows how easily stories can lose their power if the journalist or photographer doesn’t get his facts right.
(Acknowledgement to The Shanghaiist website for these photos.)
Recently, the US Midwest premium for primary aluminium went through 500USD/t while the LME cash price is climbing towards 2,100USD/t, giving an all-in price approaching US$2600. In contrast, the SHFE price is stuck between 13,600 and 13,800RMB/t. If we use 13,700RMB/t as an average and add the 15% export tariff, the FOB price for China’s primary aluminium is approximately 15,755RMB/t, or 2583USD/t, to which freight costs must be added. The simple comparison tells us the arbitrage window is near open but remains lacking the last straw. Therefore, if China eventually cancels the export tariff, it really gives a hand to ex-China downstream manufacturers, especially those in America who are suffering the incredibly high premiums.
However, will China really cancel the export tariff on primary aluminium or at least cut the rate, as the market rumour suggests? For us, we put more weight on the improbable side.
1. Cancelling the tariff can only relieve the downward pressure in the short term. More exports will lift the price, but it doesn’t structurally solve the over-capacity problem that China suffers from today. Higher profit will surely induce more players into the market or at least hinder the elimination of old and less efficient capacity. The outcome is against the government’s long term strategy.
2. When the world market reaches equilibrium, meaning China prices go up and ex-China prices go down, China will suffer more on its structural oversupply and have no way to cope with its excess metals.
3. The outcomes of the end of QE in US and new LME rules remain uncertain so far. When the financing deals become less favorable, over 4 million tonnes of legacy metal will be available in the market. The two-month supply for the ex-China market will surely threaten the price.
4. The primary sector is actually not the only one with excess capacity in the entire aluminium chain. The downstream is suffering the same problem as well. If primary aluminium price can go up benefiting the exports, those downstream producers inside China will suffer more losses, particularly facing the weak property market. In fact, that well explains why Chalco, who sold unprofitable downstream assets to its parent company Chinalco, is lobbying to take off the tariff. We don’t have precise data on the total market cap of both primary sector and downstream sector, so we are not able to quantify whether it is economical to cancel the tariff. However, it is rational to encourage more value added products rather than the raw metals.
5. Recently, we approached several industrial experts who have deep insight on China aluminium industry to verify the rumors. The majority of them haven’t heard anything from their connections inside the government.
Therefore, we do think there is more chance that China will keep the tariff but turn a blind eye on provincial subsidies and there will be more metals leaking out of China in the form of semi-fabricated products as we have addressed previously. We will keep a close eye on the change of the tariff and offer more information here.
Editor’s note: I understand a Chalco speaker at the Antaike conference touched on this subject, advocating that the tariff should be dropped, but privately Chalco is conceding that they don’t expect it to come off until the end of 2015.
As expected, China’s production of aluminium in October continued to climb, thanks to new capacities launched in Xinjiang and Inner Mongolia regions and some idle capacity resuming. Based on IAI data released a few days ago, total aluminium production was 2.33 million tonnes, (including an estimated 250kt unreported production), increasing by 2% over September and 7% y/y.
However, the daily average production dropped to 75kt from 76kt compared with last month. We believe this is a function of the week-long holiday in October, and some restrictions caused by an anti-pollution drive ahead of the APEC summit.
Shifting to other regions, world ex-China production increased by 0.6% y/y, marking the first positive growth this year. Compared with the same period year , Asia (ex-China), GCC, and East & Central Europe showed slight increases, showing in the charts below. The growth of Asia (ex-China) production was largest, with an increase of 5% m/m, followed by Europe.
This post is based on absolutely no facts. It is my speculation.
The world’s primary aluminium industry is unloved. Where once those silvery factories that extend a kilometre long were a showcase for the companies that owned them, now those same companies want nothing more to do with them. Alcoa has repositioned itself as an engineering company, focusing on downstream. Rio tried to spin off Pacific Aluminium. BHPB has created Newco, a shell in which to house its unwanted smelters.
Those spinoffs have not worked. RT could not find anyone with anything like the money they wanted. BHPB has deduced that the same will happen to them.
So a whole new strategy is needed.
What if, only speculating, just suppose Alcoa and Rio Tinto got together and combined their smelters into one new powerhouse aluminium company? Alcoa has over 3.5 million tonnes of operating capacity plus another 20% sitting idle. Rio Tinto Alcan has a similar volume of operating capacity, though less in mothballs. Together they would make an enormous producer of primary aluminium, with over 7 million tonnes of metal.
Think about what that merged company could do! A smelting group that size would dominate the price of raw materials, not just alumina but the carbon products as well. The new company would gain incredible synergies in technology and technical support, not to mention R&D. The board would be able to decide the future of new projects and the fate of old inefficient smelters without having to worry about how the market would react – they would be able to predict very precisely.
Such a company would reap the benefit of in excess of $400 per tonne in delivery premiums as well. That’s an incentive on its own – $2.8 billion in revenue, controllable to a much greater extent than any single player or the LME could do.
If I were Klaus Kleinfeld, I would be booking a dinner with Sam Walsh real soon. Something to talk about over cigars.
Oh and by the way, don’t you think Glencore would be an interested party in such a transaction? If a new company were spun off, Glencore would likely be sitting up and taking notice.
Of course, such a move would require all sort of regulatory review in many countries. But no downstream activities would be involved, nor bauxite/alumina. It would be a case of back to 1902, when Alcoa spun off Alcan as a new company.
Just speculation. No facts.
Friday further thoughts. Imagine what such a move would do for Alcoa’s share price, and the RT price as well.
Xinjiang Province, home to China’s fleet of new mega smelters, is undergoing a strong ice storm. The snow is over 13cm (5 inches) deep in some severely afflicted areas and transportation is completely disrupted.
According to the latest weather report, the heavy snowfall may stop latter today or early tomorrow, but it will take some more days for transport to return to normal. But the impact on China’s aluminium market may come quicker.
As per our latest weekly aluminium report, the bulls attempted to elevate the SHFE active price firmly over 14,000 RMB/t, however, they didn’t have the power to support that level, and the price retreated to 13,800 RMB/t. Tightness in metal supply should cause a bubble in the price, and the extent to which this occurs will tell us something about the sentiment prevailing in the market. In other words, a market which is weighed down by weak demand indicators and a shuddering economy is less likely to react to a supply disruption.
Xinjiang itself knows this weather all too well. Winter weather would have already been factored in to construction planning. But a disruption to the flow of metal coming out of the district is something that the market would not be prepared for.
Meantime, our sympathy goes to those folks who have to live and work in the extreme weather. Here in Beijing it’s a balmy 10 C, with no sign of snow. I know some readers would say that 5 inches of snow is not something to get excited about, when some areas of the USA measure snow in feet not inches, but Xinjiang’s climate is very dry, and they don’t usually get a lot of snow, except up in the mountains on the east of the province. They just get freezing cold.
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This weekend I got an email from a very respected senior analyst from a competitor company.
He was writing to question my assertion that as much as one third of China’s semis exports are really not semis at all. They are remelted in an intermediary country, then sold as primary metal. By doing so, Chinese entrepreneurs not only avoid the 15% tariff on exports of raw aluminium, but they also pick up 13% of the 17% VAT.
In his email, my esteemed friend told me “I recently visited 6 rolling mills in China, and I found no evidence of what you claim.”
He has fallen for the mistake that so many foreign analysts and commentators make. He takes the lack of evidence available to him as evidence that my view is wrong.
I felt like screaming to him, “Well of course you didn’t find any evidence. Did you expect that they were going to show you? Did you think that you being a “lao wai” would entitle you to access information that is highly sensitive? You think they are going to admit bending the spirit of the law, if not the letter, to a complete stranger? Do you think that visiting less than 1/3 of the population of rolling mills in China would allow you to draw conclusions about the other 2/3rds?”
Don’t get me wrong – this guy is very good at what he does, and he has taught me a lot in the time I have known him. I have the greatest respect for him. And I am not picking on my friend; it’s just that I see this attitude too often from all sorts of otherwise credible experts.
It reminds me of a report put out by a very well known Australian bank a few years ago. The gist of it went, “we have spent 10 days in China, and everywhere we went, we heard the same message. So it must be true.” It is bordering on hubris to suggest that one can glean a clear picture of a complex structure so easily.
I relocated to Beijing in 2005, after dealing with Chinese companies since 1998, and have been involved in the aluminium industry in China since then. Yet I consider myself still an apprentice when it comes to understanding the industry. How a guy based in London or New York can make sense of it is difficult enough, but to base an assessment on the lack of evidence when he was never going to get the evidence in the first place, is a stretch too far.
By the way, I am not asserting that we have indisputable proof of exactly how much metal is in this category. We are working on that, but quietly, and not by sending a foreigner on a 2 week visit. There are much better ways.
Bloomberg has reported that Europe is set to renew tariffs on aluminium foil coming from China and Brazil.
The tariffs were originally installed in 2009, following complaints from foil producers inside the European Union. Tariffs as high as 30% were imposed as a result of the investigation.
These tariffs were set to expire early October, but the European Union says they will remain in place another 15 months while they conduct a new investigation. The new investigation comes as a result of a submission from a group of foil producers inside the EU in June.
Recently IAI released the production figures for August. Monthly production of China aluminum (including China’s estimated but unreported production) climbed to new highs again in August, increasing to 2,277kt, up 9% compared to the same period last year. The figures show that rising aluminium prices helped induce smelters to increase product output after a sluggish first half year, assisted by various subsidies from local governments.
According to AZ China’s research, the growth of total capacity was 19% compared to the same period last month, which was far greater than the monthly production growth. With regard August of 2014, the ratio between total new capacity and restarted capacity is at 2/3, which means more capacity came from current old and restarted smelters then from new builds. After the decline and tougher months of loss leading to widespread shutdowns before June, many smelters took advantage of rising prices to restart in recent months, hoping to recover their earlier losses as much as possible. Overall, previously halted capacities have now almost recovered by August.
In addition, a large proportion of the new capacity that entered the market in August came mainly from the Shandong, Inner Mongolia and Qinghai provinces. All of which have started close to full capacity and are gradually increasing their operational rates. No smelters in the Xinjiang province have come on-stream recently. According to our statistics, nearly 1 million tonnes of annual capacity in the Xinjiang province will come online for production in the coming months.
AZ China has forecast 26.5 million tonnes of production for this year, and based on the current increase in output plus new capacity set to enter the picture, we are confident our prediction will hold true.
Although financial concerns could cause concern for some smelters, the seasonal increase in demand, especially during the ‘golden October’ period should help maintain aluminum prices in the current range, which should stimulate smelters to produce more output. Longer term, as we approach the end of the year, prices are likely to soften slightly, as the market struggles to accept all the new metal. Demand indicators are steady to good, but not spectacular.
Alumina prices are also showing the effect of increased metal production, along with some operational problems at 2 refineries.