Category Archives: aluminium
Editor’s note: This piece is by Richard Lu from our office. Richard was having problems accessing the blog, so I have posted it for him.
China’s aluminium price has performed well since the beginning of May and consolidated at RMB14,000/t in recent days. However, we think the excellent performance is at or near the ceiling. This rally of aluminium prices is due to improved domestic demand and a stronger London price, but downside risks begin to show on both sides.
Even though most economic figures pointed a positive outlook for China in the 2nd half of 2014, especially when the government re-affirmed to release more targeted easing policies, both new loans and power consumption were down in July. These indicators are part of the famous “Li Keqiang index”, after China’s Premier said he watches these indicators more than GDP. Those two numbers plus negative PPI indicates that China’s manufacturing sector remains weak. We may see huge amounts of metal come into the market in coming weeks, with near 3Mtpa restarting and new commissioning capacity on top of the current production levels. There’s not enough demand to soak up all the metal, and this will eventually turn the price down.
Additionally, the spread between SHFE 3-month and spot narrowed to RMB15/t today. Even though it doesn’t firmly indicate a downward movement, it still reflects how tight the spot market is at the moment. Therefore, we somewhat believe the market is overbought and some funds who have the same view may begin to build short positions.
On the other hand, Euro zone economy stagnated in the 2nd quarter while the improvement in the US remained unstable. Those fundamentally prevent the rally of the London price. Besides, the high premiums further deter the enthusiasm of consumer’s buying. The improved LME price plus high premium may induce some producers to restart idled capacity outside China. The narrow spread between LME 3-month and cash prices makes the financing deal to be unprofitable. Our estimation shows a -2% return if the investors continue to do so. Therefore, some metals will be untied when the contract expired and injected into the physical market. If all the above forces lead the market back to old days when effective supply exceeds the “strong” demand, London prices will accordingly fall below US$2000/t again.
Without the support of a continually improving LME, the Shanghai price will struggle to keep at its present level. And as those who bought metal in anticipation of improved demand start to realise their bet was wrong, metal will come back into the China market and the price will fall. Maybe not in August, but certainly in the coming weeks.
Editor’s note: This piece is by June Wang, from our office in AZ China. June was having trouble accessing the site, so I am uploading it for her.
According to the IAI, China’s aluminium production reached 2.2 million tonnes in June (including unreported production). That gives a daily rate of 73,500 tonnes per day, a rise of 6% over May.
In our view, the main reason for this is the return of idled smelters. With the price rising and subsidies guaranteed by the local governments in several provinces, many smelters restarted gradually in May and June.
For the first half of 2014, the total volumes of China’s aluminum production were 13.0 million tonnes. AZ China recently increased its forecast for 2014 production, from 26.0mt to 26.5mt, in response to the return of the idled smelters, and this revision is being supported by the most recent numbers.
As we know, because of the sluggish market, heavy losses and falling prices, helpless smelters chose to cut capacity levels, and some to even close permanently. The total volume of production cuts reached 1.4 million tonnes just in March to May, based on our statistics. However, entering into June, many smelters restarted their halted capacities. So far, the restarting is still in progress, as it’s not an instantaneous process to heat hundreds of furnaces back up to 950°. If nothing else, the production numbers will be bigger than the previous months even without new capacity being added. To a large degree, the production should remain at high levels over the next few months.
However, it is not only returning capacity that has boosted production. The additional capacity of new construction will also help push production levels to a new peak. According to our statistics, around 2 million tonnes of new capacities have been announced to come on-line by year-end, which is much larger figure than that of the total stopped or closed. Of course, it takes even longer for a new smelter to get up to speed, but that simply means new record levels in future months.
Supply remains ahead of demand in China, and although demand has shown a turnaround in recent weeks, supply is set to exceed demand by about 1 million tonnes, in our estimation.
In China, there is an old saying that adversity leads to prosperity. Another simple interpretation could be that poverty gives rise to the desire for change. For China’s aluminium industry, the “poverty” is getting worse. Because of surplus capacity and high energy cost, smelters can’t find a way to save themselves.
A tough competitive environment accelerates change. Reform met a lot of resistance despite the pain. We have mentioned subsidies many times in our blog. Subsidies appeared to be heroic in that they tried to rescue smelters, but in fact they did nothing of the sort. Smelters who got a subsidy from local government still are suffering heavy losses (you can find the details from our Q2 China Cash Cost). To some degree, it like a drug. If they can’t get more, the result must be facing shut down and close, especially for any small scale company.
But reform is imperative. The longer you struggle, the more pain you get. If you want to go forward, change must start at once. And it is good to see that some big groups start to take action.
According to our sources, Chalco Guangxi Branch, with annual capacity of 150kt, plan to close the smelter because they have suffered a heavy loss for a long time. Instead, they will built a power plant to serve their other facilities, such as their 2.4mt alumina refinery. Such decisive decision is very rare.
In addition, diversification is gradually emerging. Sichuan Qiya Aluminum, with annual capacity of 350kt, had halted 150kt recently and they will now close the smelter completely. Instead, they will build high quality aluminium downstream facilities with RMB10.2 billion investment. And they intend to build a downstream industry zone around their plant.
Hence, reform is not impossible. Reform is going on,, which hopefully will create a better tomorrow for China’s aluminium industry.
AZ China has completed its analysis of the cash cost curve for Q2 2014. Overall, costs went down, but not enough to save many producers.
The analysis threw out many interesting details:
- The average cash cost of production came in at RMB14,150/t (US$2,280). This is a reduction of 2% over Q1.
- The spread of costs ranged from below RMB11,000 (US$1,775) to over RMB16,500 (US$2650).
- Costs went down primarily due to government subsidies reducing the cost of electricity, though the falling price of coal helped some smelters to achieve a lower electricity cost without bureaucratic intervention.
- Surprisingly, alumina costs went down. Cutbacks in primary metal production earlier in the year left the market long in alumina, forcing the price down. With Indonesia no longer supplying bauxite, this input cost is set to rise.
- Other input costs also went down. Anode prices fell thanks to the cost of carbon falling, while over-supply of ALF3 caused that market to reduce prices.
Across the quarter, Shanghai metal prices rose 5% over the lowest price seen in 2014. This and the falling costs have provided relief to the financial performance of smelters. The “break-even point” along the x-axis has shifted right a little, crossing at about the 30% point.
For the record, AZ China has 129 smelters in the total population, but we exclude any smelter which has less than 2 years of data. This means new smelters which are still “bedding down” are excluded, as are smelters which have been idled. Based on our selection criteria, 73 smelters qualified for this analysis.
There will be a more detailed analysis issued to our subscribers. If you are not on our mailing list, please contact us at firstname.lastname@example.org.
I was scanning the daily email from Alcircle today, when two successive stories caught my eye. The first story announced “Chinese aluminum surplus likely to contract in 2014″, while the second said “Chinese aluminum production moving into balance”.
While at first glance these headlines appear to be telling the same story, the detail proves to be a bit more devilish. For a start, there’s at least 500,000 tonnes of difference between the two stories, and a whole different outlook.
The first story comes from SMM, based in Shanghai. As usual, they make the mistake of quoting the official aluminium production numbers, saying that China had produced 9.59 million tonnes to May. It’s actually closer to 11 million tonnes, because they have forgotten to add the “unreported production” figure in their number.
SMM also falls for the old trap of quoting unnamed analysts and sources. But at least they got it right when reporting that semis exports are rising.
The second story comes from Metalminer, a blog run out of the USA. They at least quote their sources, Reuters in this case, but still manage to get the picture wrong. They claim that market forces are driving the balancing act in the industry, when those of you who read this blog regularly will know that it’s local governments who are driving what’s happening. And what the local governments are doing is to drive the surplus wider, not closer.
The also somehow come up with an estimate for 2014 output of 28 million tonnes. If that number were true, it would mean a growth rate of 17% – an amazing rate of growth and well up on the best years of the previous decade. For the record, AZ China’s prediction for 2014 output is a little less optimistic than the folks at Metalminer. We predict 26.5mt, up slightly on our original forecast. We expected smelters to close when we set our original target, but didn’t expect subsidies to re-emerge, bringing some smelters to restart.
When it comes to getting real, accurate and knowledgeable insight into what’s happening in China’s primary aluminium space, AZ China at least has its feet on the ground in China. We don’t mind if you use another source for your information, but please check that they know what they are talking about. And that they are not just a news aggregator
It seems that China’s efforts to push through a solution to the pollution problems is starting to hurt China’s aluminium industry.
At a conference in Qinghai last week, local smelters told the audience that the environmental regulatory bodies have now set up online monitoring systems, to track each smelter’s emissions.
Previously, smelters had to report their output to the regulator on a monthly basis, while inspection teams went around to check for themselves. But a visit by an inspection team was a highly visible thing, so it wasn’t difficult for factories to turn on their scrubbing equipment in time for the visit.
That’s no longer possible, now that the regulator has ordered smelters to connect their scrubbers to the online system.
I suppose it’s only a matter of time before some bright spark figures out a way to send false readings to the regulatory body. Certainly these seems to be a motive to do so, because the speakers at this conference complained that the cost of making aluminium went up as a result of having to run the scrubbers full time – a tacit admission that they had not been complying with the regulations in the first place.
An article in a Middle Eastern newspaper has revealed that Aluminium Bahrain, better known as Alba, is set to begin construction of its 6th potline.
A detailed feasibility study is close to being finished, according to Alba’s Chief Executive Tim Murray, and power contracts have to be negotiated. Line 6 will also mean a new power station to be built.
This has been one of the great unanswered questions of the aluminium industry for a decade. When line 5 was built, it was done so in a way that allowed line 6 to be “bolted on” without too much additional infrastructure having to be constructed. But every year since, the question of when has done the rounds with no answer. I remember visiting Alba in 2004, when line 5 was being built. Back then, the hope was that line 6 would be announced by the time line 5 was finished, allowing construction crews a seamless transition to the new project. Hopefully they haven’t been waiting.
It’s a good time for Alba to finally bring this line into reality. There is precious little new capacity coming, despite a steady growth in demand. Metal prices are likely to rise strongly through the next few years, so one only hopes that the construction phase is completed quickly, so that the company can harvest good returns.
For the record, line 6 will add 400,000t to the smelter, taking it to 1.3 million tonnes. According to the newspaper story, construction should start by the end of this year, and be finished by Q1 2016.
Anne Stevenson-Yang is a highly respected commentator on the Chinese economy. In her most recent publication, she examines the Qing Dao commodity trading scandal in context of China’s shadow banking and credit industries.
Several of you have asked us about the Qing Dao scandal, so I am posting Anne’s report here, with her permission.
Aluminium production continued to fall in May and recorded a 4-month low of about 69,000t per day*. If you are wondering why, we would encourage you to take a look at the following charts made by AZ China.
Even though the Shanghai price had improved a little since April and remained stable in May, more than 75% of the smelters continued to run at a loss. As a result, more than 1.5Mt of operating capacity was idled or closed over the last five months .
We believe that production rates have reached the bottom and will start turning around from June. New capacities from the Xinjiang Province were gradually released and have become fully operational and some smelters in high power cost areas began to resume production as well, supported by local governments in the form of power subsidies. However, we believe those subsidies won’t last long.
The improved HSBC manufacturing PMI stats may have indicated that China’s economy will perform better, which is in line with the convention that 2H is usually better than 1H to meet the annual targets set at the beginning of the year. An improving China economy may help the aluminium market in terms of more targeted assistance being given. However, if the government is determined to play tough on cooling the property market, the largest sector for aluminium consumption, the increasing aluminium supply requirements could eventually go against those local government policies.
* China recorded 1.898 million tonnes production for May, but that does not include the Hongqiao smelters, which add another 240,000t per month.
At some point, we expect less and less government intervention in the China market, so perhaps leaving it alone is the best way to protect China’s aluminum industry.
A domestic Chinese industry portal reported yesterday that Chalco is going to invest $9.25 Bln in Shanxi before 2020. (We have posted the report details below)
“Aluminum Corporation of China will invest 57 billion yuan ($9.25 billion) in Shanxi before 2020 to build an advanced aluminum recycling industry base” the company said on its website.
“In accordance with its cooperation framework agreement with the provincial government of Shanxi, the company will develop 2 million tpy-aluminum capacity via capacity replacement, build a 10 million tpy-coal mine and coal washing plant, a 3.5 million kw low-calorific value coal-fired power plant, and a 1 million-tpy high-end aluminum fabrication project.”
Perhaps you have thought the same questions as us after reading the English language version of this report. By examining the original announcement, we found this most pertinent sentence (our translation.)
“The 2 million tpy aluminum capacity will be … through developing old equipment, not as a new project.”
This is the first time in more than 10 years that we have seen this sort of investment in China. Back in the early part of the previous decade, Chinese aluminium companies invested heavily in converting existing plants to pre-bake technology, to get around the Government’s ban on Soderberg technology. Now, Chalco is taking an old plant and significantly upgrading it to modern standards (though, interestingly Chalco refrained from naming which of its two Shanxi smelters would get the upgrade.) Based on the rest of the statement, this project will deploy the best technology for emissions control, clean-coal technology and other high level standards. This project is not unlike what Rio Tinto Alcan has done at Kitimat in Western Canada.
We can’t help but applaud this profound and significant agreement, although it will take many years to complete, but it is a good start! The present capacity of Shanxi province is a little more than 1 million tonnes, but by 2020 that number could be twice that amount, just from Chalco’s contribution. So what’s the next step for China’s aluminum industry? We will keep an eye on this and let you know!
Note: if you are confused by various online industry news sources, you are welcome to consult with us. AZ China is a better source for accurate consolidated news. News that makes sense!