Category Archives: aluminium
The Jakarta Post has carried a story that Inalum, Indonesia’s only aluminium smelter, is to expand and double its capacity.
Inalum will spend US$1 billion in the process, with the money coming from bond issuance and other debt raising. The money will go towards an incremental upgrade of their existing capacity (taking them from 250kt to 300kt) plus a new line which will produce another 200kt. The plan is to include an alumina refinery and a carbon plant as part of the expansion.
This announcement marks probably the first important project in the primary aluminium world since Ma’aden. We have been telling our clients for some time now, that the world needs new primary capacity soon, if the industry is to be able to sustain continued demand growth. It’s too easy to eye the mountain of legacy metal in and out of LME warehouses and think that the world will be okay for years to come. Apart from Ma’aden, the only other future project around the globe is Kitimat, though one day we might see Alba Line 6. And there is the expansion of Salco in Iran, but that is not a major play.
Unfortunately, it’s not a major contribution. The 250,000t of new metal represents about 4 days supply for the World excluding China.
We at AZ China have been somewhat skeptical about talk of new smelter projects in Indonesia, as the country would need to develop additional power supply and infrastructure to support a new project, not to mention cleaning up its image as a country where corruption is rife. But this project makes a lot of sense – it’s an expansion of existing capacity, being done by an Indonesian company with Government links. The Indonesian government bought the Japanese portion of the equity a couple of years ago.
Interestingly in terms of the long term supply outlook for the world ex China, the announcement says that the project will start construction this year following completion of the feasibility study, with metal becoming available in 2019. That supports our previous mantra that (apart from the two other projects named earlier and now this project), we won’t see any new metal enter the market this decade.
AZ China has re-opened after the Chinese New Year holiday, and what do we discover? While we were at family banquets, or sitting on the beach, or sitting in long journeys to and from these events, the LME price of aluminium plumbed a new recent low. Tuesday saw the metal fall to US$1686, convincingly breaking the $1700 threshold.
It was only 20 months ago at the AMM New York conference that delegates were worried that the metal price might break through the US$1900 barrier. Now that price seems quite a stretch away.
No doubt the price slump is due to sagging news out of China. With a news hiatus for the last week or so, there has been nothing to buoy confidence, and in absence of any good news, the recent poor economic indicators, and talk of a banking/credit default collapse, does nothing for sentiment in the world’s markets.
For the aluminium companies, there is some relief in that delivery premiums are at historical highs. With premiums sitting north of $400, the net effect on revenue is nothing, but aluminium companies rightly do not live on or rely on premiums. Life and death considerations for smelters are made on more fundamental equations.
So, where to for the price from here? We remain sure that the market will be net short (very slightly) in 2014, with more closures to come – and this metal price guarantees that. So although we may not yet have found the floor, in the medium term the price is likely to recover somewhat. Still, it will take for a seismic shift in the supply-demand balance to see metal prices back up over $2000 on a sustained basis. Actually, it will take two seismic events – further smelters closing, plus an unwinding of at least some of the metal held in inventory.
AZ China has recently completed its analysis of China’s cash cost curve for Q4 2013.
The most significant feature arising from the Q4 curve is the evolution over 2013 in terms of break even. What has happened is that even though the metal price has declined over the year, the number of plants and the percentage of China’s total capacity on the positive side of the ledger has improved.
Additional analysis is provided in the full client briefing note which is provided to AZ China clients as a free service.
For more information about the cash cost curve, and where other companies sit on it, please contact us at AZ China. We are about to enter into the Chinese New Year holiday, but one of us will be available most times to answer your questions.
South Africa’s Bayside Aluminium smelter looks set to close later this year, after BHP Billiton announced that it is conducting talks with employees on mitigating job losses.
The plan would be to retain the casting operations using liquid metal from Hillside smelter.
Bayside is the baby of the smelters in that corner of the world, with Mozambique’s Mozal smelter being the third. Bayside produces only 97,000 tonnes, so it will not make a huge dent in the total supply equation, though any loss of supply is like to help keep a floor under the price.
Those forced to pay the new record highs in the aluminium premiums in the USA may not feel like breaking into song, but they will certainly be asking “What’s going on?”
Mid West premiums shot up at the start of the year, and are now north of US$400 per tonne. (Mid West premiums are quoted in US cents per pound). They are now up 85% since October last year.
It seems, according to Barclays Bank, that a combination of events has triggered the dramatic rise. Now that LME warehousing costs are visible, and with a large difference between LME warehouse costs and those of non-LME warehouses, there is a rush to move metal out of LME warehouses. That has created a bottleneck at the “out” door of the warehouses, forcing buyers to pay extra to get their metal on time. Barclays also hint that perhaps part of the squeeze is due to a large player (unnamed) may have been caught short and had to act quickly to cover his position.
Barclays say that the spike will likely be temporary only, which makes sense when looking at their stated reasons for it happening in the first place.
But will we see a return to “normality”, or has a new threshold been established? To my way of thinking, the USA is going to be structurally short of metal over the longer term. It’s highly unlikely we will see any more smelting capacity added to the country, unless perhaps Ormet restarts. But fundamentally, the USA consumes more aluminium than it produces. Of course, it has the Quebec smelters just over the border, but that is still technically an import, and will likely not prevent a new floor in premiums being established. As the US economy recovers, and as auto and aerospace industries start to consume more metal, the squeeze on premiums is likely to only get worse.
Rusa’s Oleg Mukhamedshin warned the world 4 or 5 months ago, that the supply-demand equation is shifting to a shortage. There is precious little new capacity likely to enter the market in the next 5 years (and none in the USA, apart from perhaps a restart or two), yet demand is set to rise. Sure the aluminium market is weighed down by all the metal in inventory, but that is still only 4-5 months supply. Structurally, if that overhang reduced by half, the metal price will respond strongly.
Unfortunately for consumers, so will premiums in such a scenario. Or at a minimum, they will stay strong.
But in all the hubbub about US premiums, no-one that I have read has yet made the connection between what has happened in the USA, and what will happen in Japan, in the next round of negotiations in 2 months time. If the premiums have risen due to LME-based dynamics, then it’s likely that unless those dynamics change dramatically, and soon, Japanese buyers will soon be crying.
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.
The National Bureau of Statistics (NBS) last week said China’s producer price index (PPI) fell 1.4 percent year on year in December, which has sparked concerns about China’s economy. As a direct reflection, the SHFE price fell sharply in the second week of 2014, down to RMB13,845/t from RMB14,409/t compared to last week, an 8% decrease y/y.
With the whole country about to shut down as Spring Festival approaches in 2 weeks, the domestic trading sentiment is low, and traders are waiting to see the market pick up.
As the curve shows, compared with the SHFE, the LME’s price trend was more stable in 2013, fluctuating around $1,700/t.
Matt Powell, previously from Ormet and Century Aluminum, has recently started his own business.
Matt was one of the pioneers when it came to establishing sound sourcing strategies from China. Century was buying anodes from China while the rest of us were kicking tyres and conducting trials.
We wish him the best in his future endeavours!
Matt tells us he will be at TMS and also our conference in May in case you’d like to discuss more about his new business with him.
Hopefully, you will be in Beijing at the Sofitel hotel savouring some canapés and drinks! And of course, enjoying some stimulating conversations with China and aluminium experts from around the globe. The conference is four months away, have you blocked your calendar for May 5-7?
Check your inbox for recently announced keynote speakers, including Dr. Geoff Raby, former Australian ambassador to China.
Dr Geoff Raby is Chairman and CEO of Geoff Raby & Associates, a Beijing-based business advisory firm. In addition to his roles at Geoff Raby & Associates, Dr Raby is Chairman of ASX-listed SmartTrans Ltd, as well as an Independent Director on the boards of Fortescue Mining Group,OceanaGold and Yancoal Australia. He is also Co-Chair of Corrs Chambers Westgarth’s China Business Practice, Senior Advisor to Kreab Gavin Anderson, and Vice Chairman of Macquarie Group China.
Additionally, Dr Raby is a Vice Chancellor’s Professorial Fellow at Monash University and a member of the Advance Global Advisory Board. In recognition of his contributions to advancing the relations between Australia and China, Dr Raby is honoured with the title of Friendship Ambassador to Shandong Province and has been made an honorary citizen of Chengdu City.
Dr Raby was the Australian Ambassador to China from February 2007 to August 2011. We are excited to hear his outlook for China in 2020.
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If you’re a regular visitor of our conference website, you’ll have already noticed we’ve updated the agenda. You can take a sneak peak here and we’ll announce additional updates in the latest news section. An audience favorite, expert panels, will make up most of the schedule with a few solo speeches scattered in between. We’ve also allowed longer break times so you can make sure to get enough networking in between sessions. However, maybe the best networking opportunity will be the AmAZing Race and Gala Dinner. Stay tuned for more info about the fun and relaxing Tuesday evening we have planned.
What are you looking forward to the most or hoping to experience or take away from the conference? Leave a comment and we’ll do our best to support your request.