Tag Archives: MimboloveHongqiao
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”.
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.
China’s Hongqiao Group (CHQ) has announced they have signed an MOU for the acquisition of Target Company, an African company, along with Winning Logistics, also of Africa. According to the MOU, they proposed spending $120M to obtain the rights to develop and produce bauxite over a term of 25 years. Hongqiao will hold 90% shares and Winning Logistics will own another 10% share after the acquisition. The formal agreement of acquisition is expected to be completed within four months after executing MOU.
Guinea has the largest bauxite reserves worldwide according to USGS data. Target Company owns the bauxite project in Guinea which has a total resource base of 2.2 billion tonnes, 624 million tonnes of which are classified as measured and indicated. As per Hongqiao’s existing aluminium capacity of 3Mt, the classified and measured bauxite can satisfy more than 40 years’ consumption.
The MOU has not indicated the detailed schedule of mining, though I think that will be laid out in the formal agreement after four months.
Of course, signing an agreement and buying a local company are only the first steps. CHQ still has to get the mine developed, and get the ore to the shipping point. But at least they have taken a first step towards securing their raw materials supply.
We will keep watching on the follow-up information about this project.
As the world’s largest aluminium producer and consumer, China’s alumina refinery production is forecast to grow by nearly 17 million tonnes by 2018, and a further 40 million tonnes by 2030. But due to the Indonesian government’s ban on mineral exports, China is facing a growing shortage of bauxite.
Based on AZ China’s Black China Report (BCR), bauxite imports into China continued to shrink in March, with only 1.8Mt, a decrease of 43% compared to the previous month. Volumes of bauxite from Indonesia imported into China were just 477kt, down by 78% m/m, while volumes from Australia were 769kt. March was the first time that Indonesia’s shipments into China were less than Australian quantities. In addition, volumes exported from Brazil and Ghana continued to increase, with 175kt and 117kt respectively.
Smelters around the world are facing the same question, namely how to fill the bauxite supply gap? Especially for China, which has been relying so heavily on Indonesia. Aluminium companies in China are faced with a choice of sourcing more alternative supplies from Africa, Jamaica, Guyana and Ghana, or build new overseas facilities. Although most analysts say that China’s economic growth is slowing and that base metal prices will find rebounding difficult, the main players in China have no alternative but to seek new opportunities.
China Hongqiao is searching African resources and might get agreements in the next six months. The company will try to get the controlling stake in any project they join.
In addition, Shandong Xinfa plans to build a new alumina refinery in Jamaica, and the government has signed a memorandum of understanding. The investment is about $3 billion, and includes a new alumina smelter with an annual capacity of 2 million tonnes and coal power plants. Xinfa Group can export 4.5 million tonnes of bauxite and 2 million tonnes of alumina per year over the next 25 years once this project comes to fruition.
But we must face the actual situation that due to falling prices, almost all domestic smelters are suffering a loss. They can’t afford more investment. Rather than new investment in alumina refineries in Indonesia or elsewhere, it is more likely we will see more closures and companies going bankrupt.
A quick look at China’s import statistics for bauxite reveals how seriously at least one company is taking the looming deadline for Indonesian ore exports.
Shandong’s Hongqiao, a publicly listed company, has purchased 10.5 million tonnes of bauxite to the end of June this year. Given that they produce only 2 million tonnes of aluminium (growing to 2.7 mt when their 600KA line comes up to speed), that means they are buying at roughly double their actual requirement. Indonesian bauxite has a yield factor of only about 20% aluminium.
Clearly Hongqiao is expecting turbulence in their supply arrangements. Hongqiao is almost totally reliant on Indonesian bauxite, though they have purchased Australian and other material in the past. It has been reported elsewhere that Hongqiao is presently negotiating with the Indonesian government for relief from the 50% tax and the export quotas, which are due to come into effect in January.
The thing that strikes me is that a stockpile of bauxite of the size that Hongqiao appear to be building will be quite a sight. We understand from our sources that the strategy is to have 12 months supply in place by the end of this year. Using the same calculations, that means that they will need to find somewhere to put 10 million tonnes of red dirt. If my calculations are correct, loose packed bauxite would require storage of 1.2 tonnes per cubic metre, so about .83 cubic metres per tonne, or 8.3 million cubic metres.
That is roughly 3,3oo Olympic size swimming pools.
Perhaps the Great Wall of China cannot be seen from space after all, but surely this much red dirt will be visible.
An announcement from Indonesia today represents another step towards Chinese alumina producers matching their words with actions.
Indonesia has been warning exporters of base metals ores such as bauxite and nickel ore, that come 2014, only those exporters who have built value-add capacity in that country will get export licences.
A number of Chinese companies have made noises in the last 12 months about being committed to investing in Indonesia, but today, Shandong Hongqiao group have announced a joint venture with an Indonesian conglomerate for the construction of a refinery in West Kalimantan, Indonesia.
According to the announcement, the project will cost $500 million and will create 2000 jobs. The plant will have a maximum capacity of 2 million tonnes, coming on stream in stages. Initial work will commence in the next month.
China does not need alumina capacity in the near term, and the Chinese preference would be to put any new capacity on their own soil. As it is, Hongqiao has extensive alumina capacity, though it will need more of the white powder once their new 600ka line comes on stream next year.
If it really does start construction work (which could mean engineers and draftsmen, not construction) in the next month, that would make a significant step towards the Chinese acquiescing to Indonesian demands.
Another outcome from the announcement last week about Beijing’s call for restrictions on new aluminium smelters is the rush to IPO for some.
We understand that Hong Qiao, owners of the Shandong Weiqiao smelter, are rushing to revive their listing application. Readers may recall that Hong Qiao started the listing process back in January, but cancelled the IPO after just two days of investor marketing.
We can’t comment on the strengths or otherwise of this particular share offering, but if you are looking for wealth opportunities in Chinese aluminium, don’t bank on last week’s NDRC/MIIT announcement as a catalyst for new investment, despite what some prospectuses (prospecti?) might say.