Tag Archives: MimboloveReuters
Andy home, a commentator with Reuters, recently wrote an excellent article looking at the announcement from Alcoa that Baie-Comeau would lose its two Soderberg potlines, amid a general review of 468,000t of capacity. Alcoa’s announcement parallels that of Rusal, which is taking out 300,000t of capacity.
In it, he posed the question,
Alcoa may have rung the bell for round two but the key question is how many others heed the call.
But who exactly can be considered a candidate to heed the call?
Alcoa has a little over 4 million tonnes of smelting capacity, so their cuts represent roughly 10%, once all cuts are done. Rusal’s haircut represents about 6%-7% of their capacity. Outside China, the next biggest corporate player is Rio Tinto Alcan. Next on the list Norsk Hydro and BHP Billiton, then the only other member of the “million tonne plus” club is the RTA offshoot Pacific Aluminium. Beyond them, you run into single site mega smelters such as Dubal, Alba and later this year EMAL, followed by smaller companies such as Noranda, Ormet and Century.
It is difficult to see how the smaller operators can be expected to take out enough capacity to make a difference, without wiping out shareholder value. And the Middle Eastern bloc are running at sufficiently low cash cost that they are even considering increasing capacity, not cutting.
That leaves 3 companies and 4 groups of assets in the spotlight. With the exception of PacAl, which is a subsidiary of Rio, the three companies are all multi-commodity players, as opposed to the likes of Alcoa and Rusal which have only aluminium in their portfolio (Rusal has a small investment in nickel and the Rusal holding company has other interests.)
RTA has some European assets which could definitely feel the knife, but their North American plants have the benefit of low energy costs. Likewise Hydro, which enjoys low electricity costs in Norway, and has the JV in the Middle East. BHP Billiton has already signalled that their aluminium assets are under review. PacAl has some of older, higher cost assets in Australia/New Zealand, in an environment laden with disadvantages – strong currency, high labour costs, carbon tax and so on.
So if I was a bookmaker, I would probably run a book along the following lines:
Favorite: RTA Europe to provide a small contribution
Second favorite: BHP Billiton to make a false start – announcing a spin-off of assets ala RTA and PacAl
The rest of the field – won’t even make it to the starting barrier.
Dark horse – Alcoa to lap the field and extend its lead in the Capacity Reduction Stakes.
Or is it whom?
This afternoon, within an hour of each other, two aluminium reports landed on my desk.
One was from Goldman Sachs, in which they foresaw a 3-month price of US$2200 or more, and recommended a long position. Improved demand in the next few months, combined with the inability for smelters to respond to that uptick in a timely fashion, should see the metal price motor past their own long position of $2150 – according to them.
An hour later, Reuters released their Q3 forecast, prepared on a highly technical basis by Wang Tao. Mr Wang predicted a metal price of $1505, which he based on the auto Fibonacci Retracement line of 61.8% (I told you it was technical.) Furthermore, should the wave pattern continue, the price could descend to depths below $1000 – according to Mr Wang.
As usual, the truth probably lies somewhere between those two points. Should the metal price retreat below $1500, smelters would quickly pull out the circuit breakers and the mothballs. (Although that price would also open a huge arbitrage window with China – assuming China’s price doesn’t follow the LME down.)
As for the upside, it isn’t clear that demand has really strengthened all that much, and in any case, there is enough marginal metal capacity that could come on stream quickly, or is set to come into the market in any case. One such example is the RTA smelter at Alma in Quebec, where it seems the unions and management may have finally found common ground for an agreement.
We may be a touch biased, but here at AZ China, we recommend turning to the AZ China Red Book for the best information and analysis on what is really happening in the aluminium sector, especially here in China, the world’s biggest producer and consumer.
According to NBS, March saw 1.57 million tonnes of primary metal produced, which makes for a daily run rate of 50,580 tonnes. That’s a drop of 6% from February.
We have often said in here and in our reports to our clients that it is dangerous to believe the official numbers in China. But it was gratifying to see that our prediction that March would see a drop came true. Our prediction was in stark contrast to some analysts. One particular major bank poured scorn on China for a ramped increase in production in February, even going so far as to suggest that China’s producers were somehow working together to subvert the efforts by western aluminium companies to reduce metal supply.
For the last 5 years, March’s production number has been below the February number. Not only that, the February number has often been a very large jump over January. But most analysts didn’t bother to check. The only other commentator that I saw who picked this was Andy Home at Reuters.
China’s official data comes from two sources. The NBS publishes around the 10th working day of the month (we had 3 public holidays last week). They collect and report on thousands of products from all over the country, so it is hard to believe they can put much effort into cleansing the data before publishing.
The other source is China Nonferrous Metals Industry Association. They are also an arm of the Government. Their data comes out in the third week of most months, but they have their own problems. As a Government instrument, they aren’t allowed to report on output from smelters that don’t have Beijing approval to exist. That accounts for about 2 million tonnes of metal.
They have a daughter company called Antaike, which publishes a monthly report on the China aluminium industry. They feel less constrained than their parent, so they at least report on unapproved smelters, but the Chinese and English versions of their reports sometimes carry different data.
This is why it is so important to check that the analyst you are using isn’t just taking Chinese data on face value. So many analysts, so little analysis.
Only AZ China has the inside story on what is really happening at a smelter level. We will be sharing more about the China aluminium story with our clients, especially in our upcoming new report “China’s Cash Cost Curve”, and at our upcoming conference. For more information about our Cash Cost Curve Report or about the conference, contact us at AZ China. The conference website is here.
Much has been made of the reductions in aluminium output caused by the drive to reduce energy intensity. Many (mostly foreign-based) analysts have taken the announcements literally, leading them to predict that China will become a much larger importer than it already is.
We at AZ China have been speaking to many of the local plants attempting to get to the truth of the matter. Whilst we found some smelters had indeed been affected, we also found several that had defied the government order. Even using the numbers we had obtained, it was clear that the reductions were not going to be as much as predicted. Some smelters refused to take our phone calls, so we were not able to check conclusively.
Now we know that at one smelter in particular, the reason why they refused to answer us. One very large smelter in China’s south told us at a conference yesterday that they were continuing to operate despite Beijing’s directive. This is the same smelter whose “closure” was written about in newspapers around the world, leading analysts to conclude that the energy restrictions were indeed severe.
The people from the smelter told us that their local government ordered them to remain open in spite of Beijing’s order, citing the loss of jobs and local tax revenue as being more important than the central government’s objectives.
It just goes to show that you cannot believe everything you read in Bloomberg and Reuters and other news agencies. All these agencies reported that the smelter had closed. Why did they all get it so wrong? Because this smelter is owned by Chalco, and it was Chalco that issued the press release. The agencies simply picked it up and ran with it. Perhaps they tried confirming the story by calling the plant, as we did. Perhaps they assumed that the phone not being answered means the plant really must be closed. Wrong. The plant just didn’t want too many people to know that they are still alive and well.
And we are not talking a small plant. This plant produces more than 400,000t per year.
Acknowledgements to Reuters for this story. For China’s four economic levers, exports are the one which continue to weigh heavily on GDP growth. Government spending and investment are both strong, though perhaps not for the right reasons. The fourth lever, consumer spending, is not directly addressed here. But with inflation much lower and with the focus on job growth through public and private investment, it’s only a matter of time before we see an acceleration in this area as well.
China GDP growth slows to record low
By Simon Rabinovitch and Zhou Xin
BEIJING (Reuters) – China’s economy slowed in the first quarter to its weakest pace on record, but an improvement in data for March offers tentative signs that the worst may be over for the world’s third-largest economy.
Annual gross domestic product growth fell to 6.1 percent, down from 6.8 percent in the fourth quarter of 2008 and slightly below economists’ forecasts of a 6.3 percent rise.
That marks the weakest growth since quarterly records began in 1992.
Growth was dragged down largely by a sharp fall in exports in the first three months, but was offset somewhat by the implementation of the government’s 4 trillion yuan ($585 billion) stimulus package, which helped prompt a surge in lending in the first quarter.
Annual growth in urban fixed-asset investment surged unexpectedly to 28.6 percent in the first three months, while industrial output growth rebounded to 8.3 percent in March, from a record low 3.8 percent in the first two months of the year.
“The overall national economy showed positive changes, with better performance than expected,” Li Xiaochao, spokesman for the National Bureau of Statistics, said at a news conference on Thursday.
Still, Li said the drop in exports was leading to falling corporate profits, reducing government revenues and increasing difficulties in creating jobs.
“The national economy is confronted with the pressure of a slowdown,” he said.
Commodities markets, which had already braced for a slowdown in the first quarter, took the news in stride. Oil and copper prices were little changed after the figures released, holding on to earlier gains.
The yen gained against the dollar and other major currencies after the data. Currencies such as the Australian dollar and sterling had been bought against the yen ahead of the data on speculation it might be higher than forecast.
“Of course this number is a record low, but everybody expected that. It’s still an okay number which shows China is bottoming out,” said Sebastien Barbe, senior economist with Calyon in Hong Kong.
“The previous number was only slightly above this, so that means the deceleration is not so strong and the policy response — a lot of bank lending and investment by state-owned companies — is helping contain the slowdown.”