Category Archives: aluminium

What about regional power grids?

Written by Richard Lu

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”.

2014 production figures released

Written by Paul Adkins

The International Aluminium Institute (IAI) has published the figures for aluminium production for December and 2014.

China came in at 2.48 million tonnes, for a daily production rate of 80,000t.   The monthly figure includes “unreported production” of 300,000t, which is a proxy for Hongqiao’s production, which isn’t in the official figures.

Several commentators forget to add the unreported production, and even worse, some forget that smelting is a continuous process, and spend more time talking about monthly rates instead of daily rates. December’s figure is an all-time record for China, but it’s actually slightly down on November (81kt per day.)

We had been saying that the final figure for China will be somewhere between 27.5 million tonnes and 27.7 million tonnes.   The range comes down to Hongqiao’s production figures.   Since we had them at 3.7 million tonnes, and the IAI uses a straight 300kt per month for Hongqiao, we are pretty close.   According to the IAI, the final 2014 figure for China is 27.54 million tonnes.

The IAI will need to tweak its unreported figure.   Hongqiao is still adding more capacity, and will soon be at 4.4 million tonnes output, or an average of 367kt per month.   And we hear that Hongqiao isn’t stopping there.   Their final capacity target is to grow to 8 million tonnes.   Consider that the world’s leading producers – Rusal and Alcoa – both sit at about 3.7 million tonnes. Even if those two companies re-opened all their idled capacity, the best they will be able to do is match Hongqiao in 2015.

Breaking news – SHFE under threat

Written by Paul Adkins

Our sources inside the China aluminium industry tell us that Chalco has formed a coalition of 13 companies in a plan to sell metal direct to the market, outside the SHFE.   The coalition of companies will be offering direct metal sales in 4 regions – East, south, southwest and central China.

It’s not known at this stage how the metal pricing structure will work, but the combined capacity of the 13 companies represents about 80% of the Chinese aluminium output.   The union allegedly includes companies such as Qintongxia, East Hope and Shenhuo, but we understand others such as Hongqiao and Qiya have not joined.   We do not have the full list of names at present.

This is a major threat to the SHFE’s aluminium trading business.   Chalco has stood outside the market for many years, offering its own pricing structure, which usually sits a few points above SHFE.   But taking 80% of the metal out of play will be a blow to the SHFE.

We understand that at least 100,000 tonnes of metal is already being positioned into this new market.   The market itself is barely aware of the move, as it only came to us in the last couple of days, and originally just as a rumour.  We are still gathering information on the move, and will report more as we hear more.

Late update: The amount of metal being assembled for the new market is 1 million tonnes, not 100,000t.  I missed a zero.

Shandong – curtailing or growing?

Written by Paul Adkins

A news item did the rounds of the aluminium industry a few weeks ago that illustrates how little we as outsiders really understand how things happen in China.

The news article reported that Shandong province will “curtail approximately 9 million metric tonnes of aluminium capacity” in the coming years.  It was picked up and repeated by several news organisations, showing they know more about cutting and pasting than they do about China.

Shandong province doesn’t have 9 million tonnes of capacity to curtail.   Total operating capacity there is 6.3 million tonnes.

In fact, the Shandong government’s blueprint calls for the industry to limit itself to 9 million tonnes.   So the real intent of the document seems to be to promote expansion, not curtailment.   The government is actually calling for another 2.7 million tonnes of capacity to be added.   But hang on, even that is not the full story.

We believe the reason why Shandong put out this announcement was to act as a subtle brake to the expansion plans of Shandong province’s most famous and most profitable aluminium company – Hongqiao.   Hongqiao is doing very nicely at present with about 3.7 million tonnes capacity, and will be at 4.4 million tonnes by the end of this year. But we understand that the long term plan could see them grow to as much as 8 million tonnes. That would put Shandong province north of 12 million tonnes capacity.

Could it be that the local government was simply saying, “Hold your horses”? Are they really saying “Make sure you talk with us and get our approval.”  We are not suggesting there is any bad blood between the local government and any of the players, but since Hongqiao is the largest and most important player, the announcement is relevant to them above all.

Cut and paste stories about China at your peril.   There’s usually more to the story than we realise.


Defying the laws of market gravity

Written by Richard Lu

It’s a fact that about 70% of China’s aluminium capacity is now under water. Our latest Cash Cost Curve analysis (see below) shows only 30% of capacity is at break even or better, with almost 2 dozen plants in the top quartile and losing at least 2000 RMB per tonne. Economic theory tells us that businesses whose revenue cannot even cover variable cost will eventually die, a Darwinian self-healing process for the market. If the laws of market economics were to  apply in China’s aluminium market, that 70% capacity should quit the market.

But they don’t close and won’t, and here’s why.

First, let us look at the balance sheet of the entire aluminium industry in China as of the end of 2014. Our data shows the total assets of China’s aluminium industry run to about 1.5 trillion RMB, while total liabilities are about 1 trillion RMB. The net profit of all upstream sectors including bauxite mining, alumina refining and aluminium smelting was about -6 billion RMB in 2014, while net profit of all downstream sector is about 20 billion RMB. Those two numbers together leads to a net profit of the entire industry at 14 billion RMB. It means it will take a minimum 70 years to pay back all the debts. If we take the accrued interest and inflated downstream profits (inflated to reduce financing costs) into consideration, the time span would be much longer, perhaps 100 years.

China’s aluminium industry is living on debt.

As most of the loans are provided by local banks who are backed by local governments, bad debts are simply taboo. Bad debts are not allowed to appear on the books at all. Considering smelters may borrow millions or billions of RMB, one bad debt write-off may trigger a collapse of a small bank, leading to a spiralling situation and a run on the whole banking system.  History has shown in the past how quickly these situations can escalate once triggered.

Here comes the second question – given the smelters cannot close but lose money if they keep running, how do the local governments, banks and companies manage this dilemma? There are two major approaches to deal with that problem.

One way is that banks stop charging interest on the loans but keep the debts on the book. They expect price rally to earn profit and return the loan gradually. That approach is actually another kind of subsidy, but the effect may be far less than enough. If the first way doesn’t work as the price further drops, a debt-to-equity swap will be ultimate approach to avoid immediate bankruptcy. If it happens, those assets will become state-owned assets again which allows for a longer period to amortize the bad debts. Therefore, government doesn’t worry about the industry at all if the facilities are not dismantled, even without running.

For this reason, any plants which throw up their hands and declare defeat will not be dismantled.   They will be declared to be idling awaiting a price recovery.   economic We think the overall slowdown may lead to closures of businesses in 2015, but not in the aluminium industry. We estimate that there will be approximately 0.5-1 Mtpa shutdown in 2015 if the price doesn’t move up. Transfers of ownership from private to state-owned will not be publicised, and will be difficult to track, but we will be watching closely.

For this reason, if any smelters in the “dog” quartile do close, they are likely to be privately-owned companies. State-owned companies will enjoy somewhat more protection.

I mentioned before that 70% of smelter capacity is presently under water.   That figure comes from our latest Cash Cost Curve analysis.   We will be issuing a Client Briefing Note in a few days time, which will examine that number in much more detail.   Make sure you are on the mailing list, by completing this simple form.


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Exclusive – VAT refund under review

Written by Paul Adkins

This post has been removed at the request of our sources. There is a possibility that they could be identified from the information in this post.  We respect their right to remain anonymous.

For more information on developments in government policy and the aluminium industry in general, keep in touch with us either here at the blog or by becoming a subscriber to one of our regular reports.


Testing days ahead

Written by Paul Adkins

Shanghai’s aluminium price is under intense pressure right now.

We reported last week that the price broke through the RMB13000/t support line. The price dropped to a low of RMB12,825, before the bulls stepped back in.   But after two days of buying, the price could only manage to recover a small amount of ground. reaching RMB12,900 before settling at RMB12,850.

This morning already there are signs that the bulls are losing the fight.   And with a raft of monthly, quarterly and annual economic indicators due out in the next few days, we could be in for a nasty ride.   Consider this: 2014 GDP gets announced on January 20, and if it comes in under 7.5, there will be a wholesale selling of base metals including aluminium, followed almost immediately by a heavy bout of buying, as speculators bet that the Chinese government steps in to save the day.   Or the number comes out and it is 7.5 or better.   The market picks up, but quickly retreats as buyers realise that this result means that the government won’t step in.

And these roller coaster rides could get played out each day for the next week or so.

One day, the speculators will realise that it’s futile to bet on a government-led stimulus program, but meantime their presence in the market will create the roller coaster effect, as opposed to a free-fall, which is not impossible.   In the past week alone, 3 more smelters have announced they are increasing output in the run up to Chinese New Year.

We will bring you more news as it happens.

2015 production forecast

Written by Paul Adkins

AZ China has published a Client Briefing Note, in which we reveal our forecast for primary aluminium production in China in 2015.  We also go through our reasoning for the number, and the implications for the market.

And what did we forecast?   We think 2015 will see 29 million tonnes produced.

To see how we came up with this number, and/or to get a copy of the Client Briefing Note, simply complete the form below.


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Make bricks without straw of the war between aluminium and coke

Written by June Wang

China aluminium production continued to increase in November, up 9% to 2,128kt, which didn’t include unreported production of 300kt. (IAI uses the unreported production number as provided by CNIA, and the figure was increased from 250t per month to 300kt to reflect Weiqiao’s increased capacity. Weiqiao makes up the lion’s share of unreported production. But Weiqiao is now up to 3.9mt per year, or 325t per month, so we expect the figure will be adjusted again in 2015.)

Just based on IAI statistics, the average growth rate of production was 9% in 2014 until now. It is now very clear that China will hit a total production figure of 27.5mt for the year. This is above our forecast, and reflects the amount of metal that came back into the market thanks to governments subsidies.


The result of the conversion of surplus capacity into surplus metal has been reflected in metal prices, which could not find support from demand sectors.   We don’t see that getting any better. Anything the government does to improve the economy is not likely to do much for aluminium demand fundamentals, though sentiment will likely improve.

That additional metal has implications for calcined petroleum coke (CPC) and anode markets in China. China has plenty of capacity for both products, but will it have enough coke to support the consumption growth?


As the chart above shows, the anode demand gap (the gap is the difference between actual anode grade petcoke production and theoretical anode grade petcoke demand calculated by IAI production. Refer to our Black China Report for more detail) has been seriously negative since August this year. Petcoke production increased by 1% in this period compared with the same period of last year, whereas aluminium demand has easily exceeded that rate.

The recent fall in crude oil prices has not helped. Chinese refineries are stuck with inventories of high cost crude, but are also facing a market weakened by economic factors as well as low prices for petroleum products. Consequently, refineries are cutting back on throughput, leaving coke production short.  This will acerbate the gap in supply versus demand, in our view.

A shortage of coke should be reflected in the price of anodes and CPC, but so far that hasn’t been the case. Although demand from smelters is rising, those same companies are complaining that the low metal price prevents them from paying too much for their raw materials.  But calcining companies and anode producers are already in serious pain from cash flow and credit problems, and cannot sustain the price/cost squeeze. Something has to give.

Politically and economically, the solution would seem to be to bring constraints on aluminium capacity, to reduce the surplus and bring metal prices up to a point where those players still in the game can make a profit. That would also allow them to pay a fair market value for their anodes and would create a more healthy supply chain.  It’s nothing more than what several government departments in Beijing have been calling for these last 3 or 4 years.   But will we see that happen?  The loss of jobs, the loss of factories delivering benefits to local communities and the loss of “hong bao” – red envelopes full of cash – are all likely to prevent any government intervention to restrict the industry. And remember, it was government intervention in the form of subsidies that has delivered the surplus situation we are in today.

CPC and anode demand is therefore likely to continue growing, and may soon start to seriously outstrip supply of anode grade coke.   We will be examining this in the next Black China Report, as we do every month, so make sure you are a subscriber. Contact us for information about subscribing, or to see a sample.








December World Aluminium Monthly out now

Written by Paul Adkins

AZ China has published its latest World Aluminium Monthly.

This report examines the change of direction for the LME prices, bauxite and alumina supply for China, the growth of semis exports, and several other hot topics.   Will China’s economy move to a more balanced growth, and if it does, what does this do for aluminium demand?   China is still adding new capacity, especially in the Northwest of the country.   Are we seeing a transition from excess capacity to excess supply?   If so, what will this do for metal prices?   If metal prices fall, won’t we see more closures, especially those plants that have been relying on recent government subsidies?   And anyway, what’s happening with those subsidies?   Will they continue into the new year?   Are they making a difference to cash costs of production?

And what about that 15% export tariff on raw aluminium?

If you need to be across what’s happening in the world of aluminium, then you need to be a subscriber to this excellent report. If you would like to subscribe to the report,contact us using the form below.   A single-user 12-month subscription costs only US$3900, but we will give you a 10% discount if you sign up before December 31, 2014. If you want to see a sample copy before you decide, you can complete the same form.