Category Archives: aluminium

How to export raw aluminium from China

Written by Paul Adkins

One of the most popular questions we have been getting recently is, will China export more aluminium into the growing supply gap in the Rest of the World (RoW)?

It is well known that China imposes a 15% tariff on the export of raw metal, while semi-finished metal earns a refund of VAT, reducing the cost and making it more competitive in foreign markets. So the popular wisdom is that if China increases exports, it will be in semis.

And this is true. But those of you alert enough, will notice that the heading of this post does not carry a question mark.

The key to increasing exports of both raw metal and semis is … liquid metal.

Operational people will tell you that liquid metal is a great cost saving for both the smelter and its downstream customer. Instead of the smelter having to process metal through the cast house, alloying the metal, cooling it, packing and shipping it to the customer, simply send a crucible full of metal at 600° C plus to the factory. It then also save the downstream factory from the cost of reheating the metal. Provided the factory has spent some money on receiving the metal in liquid form, it saves that factory a lot of money on energy.

And liquid metal is how to export raw metal in the guise of a semi finished product. Simply pour the hot metal into a continuous caster, run the metal one pass through a rolling mill and roll it up into a coil.   It is now a semi finished good, ready for export as 99.7% pure aluminium. albeit not in a 25kg form as is usually the case.

We at AZ China will be bringing more information on this to our clients and subscribers.   Make sure you are on the list.  Contact us at blackchina@az-china.com.

 

RTA to increase smelting capacity

Written by Paul Adkins

Finally someone somewhere is investing in new metal units. But don’t get your hopes up.

Rio Tinto has announced that it will spend $14.8 million on improvements to its Alma smelter. This smelter, in Quebec province in Canada, is currently rated at 440,000t, and the investment will lift this by 12,000t.   So in reality this is nothing more than “capacity creep”, created by tweaking the amps.  The plant is of course a Pechiney design, with AP30 cells.

Alma has had a chequered history recently. The plant was at the centre of a union dispute that saw the company cut one third of production at the height of the dispute.   It was also the centre of a study launched a few years ago to examine if it could be expanded to 570,000t, though nothing ever came of that study.

Alma gets its name from the town in the Lac St Jean district in northern Quebec where it is located. (Hat tip to Gordon, who corrected my original comment that it was in La Terriere.)

 

 

Xinfa accident update

Written by Paul Adkins

Here’s the latest of what we know about what happened at the Xinfa smelter.   Please note, Xinfa have not released this information – we have gleaned it from our sources, so to that extent some of these points will need to be confirmed when/if Xinfa release an official report.

The accident occurred in line 1, not their new line.   This line was running at 500KA, according to our information.   The accident occurred at the point where the anode bar and the bus bar risers connect.   The pot where the accident happened was being brought back into operation, but there appears to have been a gap between the anode bar and the circuit, and that caused a short circuit and an explosion.    The accident did not happen in a control box as previously reported.

We estimate there will be a loss of about 80,000t of metal output, based on the fact that only half the 400,000tpa line was affected, and will be out of operation about 2 months.

The market impact is likely to be small.   Not just because it’s only 80,000t (about how much aluminium China uses in one day), but because the plant’s customers are mostly in the south and eastern provinces, where there are plenty of other metal sources.   We believe no customers will be directly impacted.

Nobody was hurt as best as we can find out.

If the accident occurred at one pot, then it begs the question, why weren’t they able to save the other pots in the line?   The official post mortem will no doubt give a full explanation and corrective actions, but what we are hearing is that there were two reasons why they were not able to save the line.   Quite simply, the plant had not invested in circuit breaker equipment, and the operators had had little or no training on how do save the remaining pots.   Xinfa may dispute this, and we have not been able to confirm this, and anyway, any investigation will be some weeks away from reporting, but that’s what we are hearing from our sources.

We will bring any more information to you as we hear it.

 

 

Some thoughts on Chalco’s 1st half loss

Written by Richard Lu

Chalco recently posted its first half results and not surprisingly showed greater net losses than the same period last year. To avoid being de-listed from the exchange, Chalco last year disposed of several unprofitable assets to its parent company Chinalco, but they are unable to do the same in 2014. Therefore, a greater net loss seems inevitable given the weaker metal price.

We agree with the statement made by Chalco’s management in their interim report that the loss is mainly thanks to the low metal price. Merely looking at the primary aluminium sector, Chalco produced a total of 1.63 million tonnes in the first half, down by 19% YoY. Meanwhile the Shanghai 3-month future price declined by 10% on average which resulted in a 27% contraction of revenue and this is just in line with the reported number. Chalco management advocated that they took lots of measures to control the cost and lead to a 3% saving on producing aluminium. So far, we think the loss sounds reasonable and the retreat in volume and price is the major cause for the disappointing performance. However in contrast, Hongqiao Group gained a 28.6% increase in revenue over the same period despite gross profits dropping by 4%.

We are not accusing Chalco of being complacent in turning the company around, especially considering the increased burden of having more obligations for social stability etc. than its competitors. Rather, we are hoping that Chalco will change its mind and attempt to boost development rather than merely control the costs. Alcoa, which was also suffering losses in the primary metal sector actually set a good example for Chalco. To break away from the soft commodity market, Alcoa is moving its strategic center to high-value semi products, which are applied to aero and auto markets and have great potential for metal producers for further development. We admit 600KA technology designed by Chalco is important in cost control and energy saving, but it never provided opportunity for diversification. We would like to see Chalco take advantage of its R&D center and invest more on downstream and make determined efforts to transform its unprofitable assets to produce high-value products. Either way, there is a long way to go.

Looking ahead, we anticipate Chalco will perform better in the 2nd half, given that aluminium prices have been well above 14,250 RMB/t, in addition to the substantial government subsidies. The recovering ex-China demand will undoubtedly continue to assist London prices to go up which will further support Shanghai prices to run at a higher level than the first half of the year. The latest news about Xinfa’s accident shocked the market and will also push up aluminium prices for a while. All the fundamentals are supporting Chalco and its peers, so let us see whether Chalco can pull itself out of the mud.

Xinjiang now the largest producer in aluminium production

Written by Lydia Hang

In recent years, Chinese aluminum production capacity has transferred rapidly to the western region, especially to Xinjiang that has a large concentration of new production capacity. In the first seven months of this year, Xinjiang primary aluminum output was 2.275 million tons, an increase of 89.5%. Compare that with Henan province, the traditional home of aluminium production in China, where output was 1.978 million tons, an increase of 2.9%.

Xinjiang province is now the largest producer of aluminium production, relegating Henan to second place. This is the first time this change of position has occurred in the past 10 years.

Currently, the largest production areas are Xinjiang, Henan, Qinghai, Inner Mongolia, Gansu, Shandong, Ningxia, Yunnan, Shanxi and Shaanxi. The total output for these regions reached 11.7 million tons, accounting for 86 percent of China’s production.

According to sources at the Xinjiang Nonferrous Metals Industry Association, primary aluminum production capacity is expected to reach 6.0 million tons in Xinjiang by the end of 2014.

By the end of twelfth “Five-Year Plan”, Xinjiang will build 6.5 million tons of aluminium production capacity, plus semis processing capacity of 1.2 million tons. The formation of coal, electric power and metallurgy will become one industry chain, creating a value exceeding one hundred billion Yuan.

Xinjiang is set to become the new centre for aluminium in China, and by 2017 will be the largest production centre for aluminium in the world.

Meanwhile, Henan will continue to decline. Its electricity costs are more than 1,000 Yuan per ton higher than that of the western region. It will therefore be under great pressure to engage in industry transformation and upgrading, energy conservation and an Industry-wide turnaround.

New support at 14250, an opportunity to short?

Written by Richard Lu

Both Shanghai and London prices gained last week. The Shanghai active future contract price (AL1410) closed at 14,330 RMB/t last Friday while the London cash price also hit record highs since March 2013, at 2,058.5 USD/t last Thursday. Strong demand both inside and outside China fueled the improvement of the global aluminium industry.

The decline rate of Shanghai inventory reached over 4% last week, which firmly indicates the tightness of the China aluminium market at the moment. This may support the Shanghai price to range between 14,250 and 14,500 RMB/t this week. However, we still feel the market is overbought for the longer term.

Being one of the essential leading indicators, the HSBC flash PMI came in at 50.3 in August, which is far behind July’s final reading of 51.7. That contraction pointed out the recovery remains unstable and downside risks still remain. Along with more running capacity to inject into the market and transportation having been improved, the supply will fundamentally overwhelm the bullishness of the China aluminium market.

If the price hits 14,500 RMB/t then we feel that’s the opportunity to short, and be ready before the correction happens.

Downside risks on aluminium prices

Written by Paul Adkins

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.

High and going higher

Written by Paul Adkins

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.

Reform can never stop

Written by June Wang

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.

Cost of Chinese aluminium decreases

Written by June Wang

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.

 

cash cost

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 blackchina@az-china.com.