Differing views

Written by Paul Adkins

Further to our recent post, Platts have picked up on the mismatch between our views and those of Royal Bank of Scotland.

Here is a copy of their article.

Analysts divided on China’s reported aluminium output increase

A reported increase in China’s primary aluminum production for February has divided analysts, with some saying it undermined cutbacks made elsewhere in the industry, while others describe it as a statistical “catch-up” and not actually representative of a physical increase inproduction.

Three-month aluminum on the London Metal Exchange traded below $2,000/mt in the fourth quarter of 2011, a level at which a large proportion of global capacity is estimated to be cash negative.

According to data from the International Aluminium Institute, China’s primary aluminum production averaged 53,400 mt/day in February, up from 48,900 mt/day in January and from 46,600 mt/day in February 2011.

China’s February production totaled 1.548 million mt, up from 1.517 million mt in January and from 1.304 million mt in February 2011, according to figures from the IAI. RBS said this is a daily output increase of 9.1% and is equivalent to annualized production of 19.48 million mt/year.

However, the bank said that ex-China, primary aluminum production for February was 68,897 mt/day, down 0.1% on the January production rate. “Once again Chinese aluminum producers have in one fell swoop managed to eradicate all the work done by other producers in cutting smelting capacity,” RBS said in a recent research note.

Likewise, Barclays Capital said China has increased aluminum output while capacity in North America and Europe has been cut back. “The supply-side of the aluminum market has experienced a sharply divergent trend so far in 2012 between China and the rest of the world,” the bank said in a research note Tuesday.

BarCap listed a number of reasons for the Chinese increase, but added that China has closed or curtailed about 1.1 million mt/year of capacity since the third quarter of 2011.

BarCap said cost pressures at Chinese smelters may not be as intense as in other regions and that the integration of alumina smelters and refineries can reduce alumina costs by as much as 30%. In addition, the bank said that of the estimated 4 million mt/year of new Chinese aluminum capacity set to come on stream in 2012, much will be able to be produced cheaply owing to low power costs.

The bank said 3 million mt/year of this aluminum capacity is already on stream. BarCap also said that Chinese producers have been able to maintain higher production levels owing to credit made available from the use of aluminum as collateral in inventory financing.

However, Beijing-based aluminum research consultancy AZ China said the reason for the Chinese production increase is more anecdotal and can be explained by the fact that some aluminum smelters did not report January production data owing to the Chinese New Year holiday. “The February numbers include some “catch-up” from January. Recall that Chinese New Year was the last week of January, so not all smelters responded to the usual monthly request for production data,” AZ China said.

In addition, February is usually a “catch-up” month from the previous year due to a reluctance on the part of some producers to report full run rates in the second half of the previous year, the consultancy said.

Aluminium production data from the China Nonferrous Metals Industry Association supports this claim and shows an increase in February, followed by a slip in March for the last three years. For example, in 2011 the reported daily run rate at Chinese smelters was 40,800 mt/day in January followed by 46,610 mt/day in February and then a drop to 46,060 mt/day in March, according to data from the CNMIA.

“In the last two years, we have had macro issues — energy intensity targets in 2010 and shortages of electricity in 2011 — that have made the truth hard to publish. So the producers play catch-up in the early part of the following year. It’s too obvious to put the extra production in January, so it slips into Feb,” AZ China said. The consultancy added that it is also difficult to attribute the increase to new smelters or restarts. It said a typical pot only produces 1-2 mt/day and that there has not been a sufficient increase in smelter output to account for the February rise in Chinese aluminum output.

In addition, AZ China said alumina and carbon prices would have jumped in response to such a marked increase in aluminum production.

“The price of aluminum fluoride, a key material in the start-up of pots, has been dropping,” the consultancy said.

Three-month aluminum was trading at $2,177/mt on LMEselect at 1253 GMT.


			

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