Category Archives: Aluminium

Tariff cancellation – why it isn’t a snub to Alcoa

Written by Paul Adkins

Thursday’s news of the cancellation of some Chinese export tariffs on a small selection of aluminium products caught everyone by surprise. Many jumped to the conclusion that it was a slap in the face to Alcoa, particularly Alcoa’s President Klaus Kleinfeld, who had come out only days earlier saying he was confident China would block exports of some “fake semis”.

But I don’t see it as a snub, even though it’s an own goal for Alcoa and Mr Kleinfeld.

The original Chinese Ministry of Finance announcement is dated April 15, some 8 days prior to the foreign press getting hold of it.  (I can only put this delay in the news down to an English translation not being available before Thursday.)

Government departments the world over are not known for their swiftness.  To make an announcement on the 15th, there would have been a period of consultation with industry groups, possibly following a pitch to government by a particular company, which could have occurred many months or years ago.   The consultation would then lead to decision-in-principle, which in turn would lead to a set of internal and inter-departmental approvals and advisories.  To me, it’s quite possible that this decision has its roots back in February or perhaps even earlier.

So the real surprise is that in all the time it would have taken for the decision to percolate through the chain of command, Alcoa’s China team didn’t know about it, or didn’t provide the right advice to Mr Kleinfeld’s office*.  Mr Kleinfeld’s comments in the analysts’ call following Alcoa’s Q1 financial results announcement would not have been made without advisement.  For him to express confidence that China would move to limit the export of so-called fake semis, he must have had his Government Relations people’s advice that they had been lobbying hard and were confident that their message was getting through.

And Mr Kleinfeld may still be right. What the Chinese government has done is to move a couple of products off a tariff list. Remember, only unalloyed raw metal exports incur a tariff on the way out of the country. Semis and alloyed products do not.   This announcement fixes some “loophole products” as one senior Hydro person put it to me.   The Chinese government may still take other actions or make other announcements, at some time in the future.

I just don’t like Mr Kleinfeld’s chances of being proved right any time this year.

Meantime, I suspect there were some furious phone calls between New York and Shanghai on Thursday.


* Remember that Alcoa China is in a strategic alliance with CPIC, a State-Owned company. They closed their Beijing office and moved to Shanghai a couple of years ago.

China to remove export tariff on aluminium strips and rods

Written by Richard Lu

The Chinese government recently announced to remove export tariffs on aluminium strips and rods from May 1st, which currently attract provisional tariffs ranging from 5% to 15%. The action taken by the government will reduce the FOB price of such products by 5-15% and motivates producers to export larger volumes.

We think the action taken by the government won’t impact semis export too much as expected. As we stated previously, the fake semis exports must be backed by the VAT refund. Given the refund is not offered, it’s not possible for producers to export such certain products with a much larger scale. Therefore, the semis export will stun on its current rail.

However, the sign showed that the government started noticing aluminium and finally do something on this industry.  It indicates there is opportunity for the government to expand the scale of their actions. But this action is in the opposite direction to what Rusal, Alcoa and others wanted.  Is it a snub to these companies? We don’t think so, but it is certain worrying that the only sign of action by China is to boost exports, even though it’s only for a tiny slice of the market.

It’s not to say that there won’t be other announcements, but typically tariffs are only tweaked twice a year.

We we will have more on this in our World Aluminium Monthly, which is due out in a couple of days.  Contact us if you want to subscribe.


RoW all-in price to trend down further

Written by Richard Lu

Aluminium’s all-in price (LME plus delivery premium) in the rest of the world outside China (RoW) has  experienced substantial falls since early this year. There has not yet been a unanimous agreement by market commentators on what truly caused the sliding price, but we notice fake semis leaked from China as perhaps the most direct cause, especially in Asian market.

Debate is still going on at the moment, about when the semis exports might stop or slow down and to what extent it will further drive down the RoW market price. Based on the data and information we’ve collected so far, we think it still has a great potential the semis export number to climb. Given less metal available being traded in SHFE thanks to Chalco’s activity of drawing metals out of the market, the future price gained rallies in early February and mid-March. However, when the government announced to cut electricity price, some leading market participants immediately closed their long positions and turned to short the market, which resulted in a substantial fall in early April. Since the falling future price will no longer favor carrying metals, all the inventory held by the sell-side consortium will flow out to the physical market or the ex-China market.

As China’s economy is slowing down despite the government’s easing policies, we think domestic demand won’t pick up quickly or substantially enough to digest all that additional aluminium supply. The only outlet of those metals is the RoW market. Based on our theoretical calculation, RoW all-in price must fall below 1900 USD/t to touch the break-even point for fake semis. In other words, there is still enough room to favor that business.

In summary, the fake or real semis will continue to flow out from China and suppress the all-in price in the RoW. This is a shift in our position on fake semis exports.   We have previously argued that the fake semis phenomenon is a temporary activity that will eventually stop.   We still think it will eventually stop, but not before a lot more metal enters the RoW market.

We will give more in-depth analysis in our next World Aluminium Report.


Power price cut matters?

Written by Richard Lu

The Chinese government last week announced a cut to the Feed-in Tariff, the price paid to power generating plants by grid companies, by 0.02 RMB/KWh and commercial electricity price by 0.018 RMB/kWh. When the announcement was released, some commentators immediately jumped to the conclusion that this cut would lead to a cut in the cost of making primary aluminium. Assuming 13,500 Kwh electricity required to produce one tonne of aluminium, the cut provides about 240 RMB/t or equivalent to 40 USD/t savings to aluminium smelters. However, the truth is that the power price cut doesn’t really associate with cash cost reductions.

We sort Chinese aluminium smelters into three tiers. Smelters in the first tier are running with captive power plants. They have already been purchasing fuels at market price. In other words, if the off-grid fee doesn’t change, there is no impact on them at all. Under the Chinese system, they must pay a transmission fee,even if they own the power generator.

Smelters in the second tier are running without captive power plants, but have already secured direct power supply with local power plants. Given their contract prices have been much lower than the market price, we don’t think power plants who are supplying electricity to them will further reduce the price until the current contract expires. Smelters in the third tier don’t have the means to generate their own electricity, and don’t have the position to secure a direct contract.   That puts them either idled  or surviving on government subsidies. Those companies will benefit from a lower on-grid price, but it’s virtually certain that any subsidy presently granted will be adjusted down. Across the 3 tiers therefore, there is virtually nobody who gains a direct and sustainable benefit.

Unfortunately for producers, the market didn’t see it that way.   Immediately the announcement came out, the market drove the price down by about the same amount as the theoretical saving. So the net effect on cash costs and margins has been net negative.

We do see some positive impact on the demand side. The aluminium industry isn’t the only large consumer of electricity, and manufacturing generally should see their costs go down.  That includes the downstream aluminium sector – semi-finished and finished aluminium goods.  The industry can do with some increased demand, to soak up surplus metal.


Written by Paul Adkins

When I was a kid, we had a tabletop game called Mousetrap.   You had to build a convoluted structure of wheels and turntables and other bits, until a ball was able to make its way along a circuitous path to drop a cage on a plastic mouse.

I mention this, and remind older readers of the game (it’s probably an app on mobile devices now), because that’s how the China aluminium market is performing these last couple of weeks. There are all sorts of machinations, speculation, rumours, misguided reactions and lack of clarity pervading the market at present.

Consider this. Aluminium prices have risen since late March, but why?   The official rhetoric is that we are entering a period of stronger seasonal demand, which is true, but the price rise comes at a time when  exports are falling, meaning more metal in the local market.  Second consideration – the market is shifting to a backwardation situation.  At the same time, we have Chalco’s sell-side consortium offering to sell metal outside SHFE.   We also have Chalco putting a huge chunk of money aside as an impairment charge against closures of capacity.   With the rumours of pending closures swirling, why is the future price being sold off?

Meantime, the government took a breath from its constant barrage of condemning over-capacity to offer local government some extra financial rights. It also reduced the on-grid price of electricity.   Both actions support the local governments’ actions in providing subsidies to keep small inefficient plants alive.  Why does the government’s actions not meet its rhetoric?

As if these traps and pitfalls are not enough, there’s also the matter of metal origin.   Most international commentators and analysts treat China’s exports of semis as a homogeneous coordinated and pandemic action.   Not so.   The metal leaving China is doing so because it cannot be sold on the SHFE.  Of course the recent spate of metal exports is a reaction to the arbitrage opportunity that was opened last year, but did anyone stop to ask, where is the metal coming from, and why isn’t the domestic Chinese market reacting to the apparent shortage that should have been caused by such a large increase in exports?

There are complex reasons for these apparent inconsistencies in the market.  We will be going into more detail about these reasons, and why we think it’s a dangerous game, in our next World Aluminium Monthly.  For now the point is, if you are going to enter this game, don’t be the mouse.

Alcoa’s Q1 announcement – some responses part 2

Written by Paul Adkins

As usual, Alcoa’s quarterly results were accompanied by an analysts’ presentation, during which Klaus Kleinfeld and Bill Oplinger went through all the key numbers. During the presentation, the subject turned to the question of China’s semis exports and the recent explosion in volume.

Klaus Kleinfeld called the entrepreneurial side of these exports “fake semis”, which caused me to chuckle. I can only think he has seen this cartoon which we posted back in October 2014.

Al disguised












But it has a serious side, all this export metal. Mr Kleinfeld expressed a hope that Beijing would rein in the practice.  But it raises the question, what would happen inside China if that metal was no longer allowed to leave?

According to our research, at least 1 million tonnes of the exported metal in 2014 fell into the category so succinctly described by Mr Kleinfeld.  Yet despite all this metal being unavailable inside China, metal prices remained sluggish at best. And despite sluggish prices, most loss-making plants continued to struggle on, living off no-interest loans, subsidies and other financial card tricks.  If one million tonnes of additional metal had to find a home inside China instead of outside China, metal prices might fall, but there’s no indication that a greater rate of closures would take place.  Indeed, the Chinese government appears to be at least indirectly supporting the industry, by changing electricity prices as I mentioned in the previous post.

I also mentioned that there are rumours circulating that Chalco is planning to shut up to 3 plants, and say goodbye to as many as 14,000 employees.  China certainly needs some capacity to be taken out of the equation, but my point is, even a closure of up to one million tonnes would only offset any action by Beijing to reduce exports of fake semis.

There’s another dimension to the whole question of “fake semis”, which so far most analysts have missed, and that is, where exactly is this metal coming from?   Which smelters, which companies, which provinces?   And why some plants and not others?   We will go into this some more in our next World Aluminium Monthly.

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Alcoa’s Q1 announcement – some responses part 1

Written by Paul Adkins

Alcoa’s Q1 results announcement got two different responses from the financial press.  Those who compared the numbers with Q1 2014 thought it was a good result, while those who looked at Q4 2014 thought it was a disappointing result.

Either way, it proves how sensitive Alcoa’s performance is to variations in LME pricing. According to Alcoa’s own data, the average price achieved was US$2205 in Q1 2014, US$2578 in Q4 2014, and $2420 in Q1.  That represents an improvement of 10% Q1 2015 compared to 12 months ago, but a 7% drop from last quarter.

But I was particularly interested in a comment from Bill Oplinger about improved demand and increased supply.   In his remarks to analysts, which I listened to, he said in relation to China that “Smelters have been reluctant to curtail as prices have recovered.” Both ends of this statement deserve to be challenged.

Some smelters have in fact curtailed production, and our latest Pipeline Report shows that about 400,000t has switched off so far this year. The problem is not so much that smelters are reluctant to curtail, which is true in itself, but that new capacity keeps getting added.  Again, our Pipeline Report shows that more than 400,000t of new capacity was added in March alone.

Second, he says that prices have recovered.  In an industry where the average cost of production sits at RMB14,500, there’s few operators in China who would see much good news in the current market price. At the start of this year, prices were sitting just a shade above RMB13,000. They spiked briefly mid February when Chalco announced its cartel, then dropped back.   In fact, it has only been in the last 10 days or so of March, and early April, where prices have scratched their way to RMB13,500 mark.

And one has to ask, why did metal prices rise in these recent days?  According to what we are hearing, Chalco is trying to drive the price up by buying metal. Yes, that’s right – the company that just declared a loss of RMB16 billion for 2014, and took an impairment charge of RMB7.5 billion for possible closures, is adding to its already-extensive holdings of metal by sucking metal out of the market.   We have heard a figure of 600,000 tonnes to date, but we have not been able to verify this yet.

The problem for the Chinese market is that nothing has changed. Structurally, the market is over-supplied, despite the leakage of metal into overseas markets (more about that in another post).  Demand sectors have seen no magic bullet, and the recent actions by the Chinese government (re-jigging the relationship between electricity generators and the grid companies, lowering the base price of electricity, allowing bond issuance at local levels) will only keep plants alive longer.   So the pressure on metal price is all downward. (We are also hearing that Chalco is planning to shut 3 smelters, but again, we have been unable to confirm this. And I will comment on this in the next post.)

It’s a truism in the aluminium industry, that companies don’t close plants (or open new ones) based on price, but on price outlook. The outlook is China is negative for prices, so Bill Oplinger’s comments don’t quite sit true to the real situation in China. But the fact that plants are not closing at a much greater rate, despite a negative outlook, means that there are other drivers at work.   We will be discussing those other drivers in our next World Aluminium Monthly.


China’s semis exports – what next?

Written by Paul Adkins

After growing by 20% last year, China’s exports of semi-finished aluminium continues unabated. But is the tide turning?

It’s a high risk play, but some willing entrepreneurs in China have found a way to move surplus metal out of the country, and pocket hefty profits along the way.   The combination of LME prices plus the delivery premium, along with low Shanghai prices and a refund of VAT, have opened a sufficient gap to generate margins of as much as 30%.

But conditions are changing.   The LME remains below US$1800/t, and the surplus metal already exported is weighing on delivery premiums. As well, there is talk that the Chinese government is looking at discontinuing the practice of refunding exporters their VAT. Recently, Rusal has been kicking up the sand, lobbying various government bodies around the world to bring attention to the size of the practice and its implications for local markets, employment levels and so on.

If Beijing were to take some form of action, either due to Rusal’s lobbying or due to other drivers, chances are it will hurt those who are genuine buyers and consumers.  There are countless companies in the US and elsewhere who can source raw materials from China cheaper than from local markets, where the metal price and mid-west premium make traditional suppliers too expensive.

This is the kind of trade that could turn off as quickly as it started. Assuming a shipping container full of metal needs 3 -4 weeks to transit to its destination port in the US or Europe, it means that metal flow would stop about 2 months after any decisive action.

We don’t have any inside knowledge as to when these exports might stop, but we have been saying all along that the whole business is opportunistic.  Opportunities come and go, risks rise and fall – players can leave the table at any time.

We carried a detailed analysis of this situation in last month’s World Aluminium Monthly, and we are planning to report on it some more in the upcoming issue.   In particular we will be focusing on Chalco’s response to the metal export situation, especially in light of their recently-formed cartel… oops, I meant consortium.

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426,000t to go

Written by Paul Adkins

Alcoa has carried out the first leg of its review of smelting capacity, announcing the closure of its last remaining smelter in Brazil.

The Alumar smelter was running at a rate of 74,000t after suffering previous cutbacks.  This leaves Brazil with just 2 smelters producing a little over 900,000t. Brazil is already a net importer of metal, a situation which will see premiums rise further, especially in the run-up to the next Olympics.

Alcoa announced it was reviewing 500,000t of capacity with a view to moving itself down the cash cost curve.  Immediately the announcement came out, analysts pointed to Brazil and Spain as two most likely candidates for curtailment.

Alcoa has 3 plants in Spain, but two of them were idled during the previous round of cuts.  At that time, the idling was declared to be “partial and temporary.”  The two plants have a combined capacity of about 170,000t.  If those two plants move to a new status of “complete and permanent” closure, that would still leave Alcoa with about half of its 500,000t target to be found. Alcoa is starting to run out of choices in far-flung countries. Assuming the third smelter in Spain is safe, Alcoa still has Norway, Australia and Iceland as targets, but some North American plants might now be feeling the heat of the spotlight falling on them.  It has been reported that Australia’s Portland smelter was not part of the review, while Norway and Iceland are relatively low cost plants, according to our data. Assuming the 500,000t target was not an arbitrary number, it does start to look like North America will be the third leg of the cuts.

(Note to Alcoa – your Alcoa Iceland web page shows it is under construction and will be ready in October 2014.)

Which country’s aluminium production grew by 13% in 2014?

Written by Paul Adkins

If you said China, you would be wrong.

India’s aluminium production grew from 1.68 million tonnes in 2013 to 1.91mt last year.  This impressive growth came about due to several projects coming on line – HINDALCO’s Mahan and Aditya smelters, with a capacity of 359,000 TPA each, began operations, while VEDANTA’s Korba­ II smelter also started operating 84 of its 336 pots in 2H2014.

Demand growth was nowhere near that level, but Indian aluminium companies have benefitted from the structural shortage of metal in the world. Indian exports of primary aluminium rose by 72 per cent YoY between January and November 2014. Indian aluminium production generally enjoys a relatively low cash cost of production. HINDALCO exported almost half of its production, compared to less than 20 per cent last fiscal year. VEDANTA exported about 40 per cent of its output against about 30 per cent in FY 2013-14.

The export outlet may not be the relief in 2015 that it was in 2014. So far this year, LME prices have been under-performing, and India’s producers find their cash costs rising, thanks to the increased cost of coal.

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