Qing Dao Downer

The China Aluminium conference is being held here in Qing Dao, and several hundred representatives have descended on the city to discuss the market and the outlook. Perhaps in line with the mood of the conference, yesterday was raining in Qing Dao, though as a result of that rain, today the sky here was clear.

Quite by accident I found myself invited to the conference dinner, despite the fact that I wasn’t a registered attendee. My thanks to my hosts! At the dinner, President of Hongqiao Mr Zhang Bo expressed the hope that prices would soon bounce back. But it seems a forlorn hope.

I understand the NDRC is looking to reduce electricity grid prices by RMB0.03/KwH. The problem with such moves is that, like subsidies from government, they flow straight through the fingers of the producers and into the pockets of the market players. The market is ruthless when it comes to savings on the supply side, and with coal prices set to fall further, the only conclusion is for the metal price to find a new low. Based on what industry people told us today, I suspect we will see prices drop below the RMB10,000 mark before the year is out.

It’s also worth remembering that in a falling market, the first thing that buyers do is to step back. They want to see how low the price will go before re-entering. That removes the support lines that would otherwise prop the price up.

If metal prices still have a way to fall, won’t that cause Chinese smelters to exit? Not necessarily and certainly not immediately. China still remembers cutting too quickly and too deeply in 2009 following the GFC. As well, Chinese producers all want “the other guy” to cut first. And above all, it comes down to whether one’s view is that prices will recover or stay at the present lows. China’s Communist Party is meeting this week to finalise the 13th Five-Year Plan, and there is still hope that maybe demand will pick up as the government continues to steer the economy on a growth path.

If smelters don’t exit the market quickly, will that put pressure on Beijing to consider removing the 15% export tariff on raw metal? I don’t think so, though there is a minority view that it could still happen. Beijing rejected the proposal last year because it would be tantamount to encouraging an industry that they are trying to restrict. Now, with the economy looking for any help, boosting exports by adding raw aluminium to the mix would be a help. That might also help struggling smelters and the banks that are supporting them, and protect jobs. It’s a good argument, but it misses the point that removing the tariff and increasing exports would only drive the LME down, and that would dampen the exporters’ profit margins. Any gain from removing the tariff would be short-lived.

It’s also interesting here in Qing Dao that the mood is not as negative among producers as it is among traders. Producers seem to accept that although the low price might drive one or two smelters to the wall, overall the outlook is positive. By that they mean that China will continue to add capacity and make more metal, even if demand struggles to keep up.

While that may seem a strange attitude, the people we spoke to said that one has to remember, it’s not about the metal price or metal profits in the first place. Integrated producers such as Hongqiao are able to generate a lot more business because their downstream units have a lower cost price and can compete better. Upwardly-integrated producers such as some of the coal companies make their money at the coal-electricity level, with aluminium just a means of balancing load.

Meanwhile, one reporter put it to me that there is some deliberate shorting going on. That’s hard to prove - it’s possible, but right now one would say the safer bet is to short the market in any case, rather than to go long.

There’s probably 500 people here in Qing Dao for the conference, and although many people think along the same lines, there’s enough colour in attitudes and outlook to say, “Wait a minute, it is not all gloom and doom.”