China aluminium prices fixed to rise

We at AZ China have been forecasting aluminium prices to fall, as supply ramps up and demand proves to be less strong than appears. And we aren’t the only ones - I just read a Bloomberg report that the ANZ bank in Australia expects the same.

But they and we have not counted into our planning that prices could well be fixed upwards from here on. Why? Because a new Joint Venture company established in China has a mandate to do just that.

The company, ZhongHeng Xieli Investment Company Ltd, is the creation of 6 major Chinese aluminium companies. The six partners - Chalco, State Power Investment, Weiqiao Group, Yunnan Aluminium, JiuGang Steel & Iron Group, and Jingjiang Group - got together under the CNIA banner recently to come up with a plan to keep prices high. The new JV company received its operating licence this week.

There are no details available as yet on how the new company will achieve its goals. But the classic strategy when the supply side collaborates like this is to be a buyer when prices show signs of weakness, and a seller when prices are over a target price. If that is the strategy, the new JV company will need deep pockets. The fundamentals are deteriorating, as I mentioned at the start, so the new company may find itself fighting a King Canute-style battle. A simple calculation says that if prices fall as we expect them to, this company will need a war chest of at least RMB 4 billion, probably a lot more.

Interestingly, these are the same producers that met a couple of months ago. At that time, the reports were that the meeting failed to reach an agreement on preventing the price from falling below RMB11,500/t. Perhaps this is more of the same - messages issued to try to convince the market that the price will rise, with little of substance to back the message. But this time they are not talking about a defensive strategy against a falling price. This time they are talking an attacking strategy to keep the price up.

AZ China is continuing to monitor developments, and we will bring more information as we discover it.