Monthly Archives: November 2013
With yesterday’s announcement that the Gove alumina refinery is to close within the next few months, the regional bauxite and alumina markets are set for a bumpy ride. But let’s look at the fundamentals.
Gove contributed around 3 million tonnes of alumina, the equivalent of about 1.5 million tonnes of metal. Its markets are/were China, India and the Middle East, with a combined capacity of more than 30 million tonnes. So Gove supplied about 5% of the regional market.
Gove won’t disappear overnight. The reason why it will take 3 months or so to complete the closedown will be to honour existing sales contracts, as I understand Gove was fully sold through to the end of March. So it will be an orderly exit, and customers will have time, if they haven’t already, to shop around for other sources.
In its place, Rio Tinto will put the equivalent amount of bauxite into the market. As well, there is some expectation that RT will expand the bauxite mining to create a few extra jobs. So at least 8 million tonnes of bauxite, possibly as much as 10 million tonnes.
That is music to Chinese and Indian ears. Both countries have alumina refining capacity that could use that bauxite. China in particular will be keen to get hold of the extra bauxite, in light of the uncertainty surrounding its other sources. Indonesia is about to roll out its new export tariff regime, and West Africa is always going to be difficult for China.
The total equation of raw material supply into the primary aluminium market does not change because of Gove closing. Just the nature and point of processing shifts, from the Northern Territory in Australia to refineries in Shandong and elsewhere.
The reality is, China only imports alumina when it can’t source sufficient bauxite. A look at the two sets of import statistics will confirm this.
The winners out of this will clearly be RT, for a start. They go from losing millions per month in Gove, to making money on bauxite. And although additional bauxite entering the market should cause prices for the red dirt to soften, this bauxite enters the market just as the new Indonesia export tariff and quota system starts to bite. If Indonesia goes ahead to reduce bauxite exports, and increases the export tax, it pushes the fixed cost of bauxite up. RT will seek to equalise the price of their bauxite to that of the fixed minimum price coming out of Indonesia. Win-win for RT.
Perhaps the market will whipsaw as players adjust to the new reality. But the fundamentals do not support anything other than a shift in bauxite prices to reflect the situation in Indonesia, not the situation in the Northern Territory.
Rio Tinto today announced that it will wind down operations at the Gove alumina refinery, with the loss of about 1100 jobs.
RT expects that the refinery will close within the first 2-3 months of 2014.
The announcement comes as no surprise to anyone who has been following the protracted story since February. It could even be argued that the Northern Territory Government, the local government in Australia where the refinery is located, is to blame for the demise of the refinery, at least in part.
The NT government showed itself to be a poor negotiator throughout the process. In fact, if they hadn’t offered natural gas, then rescinded the offer and replaced it with a hybrid solution, perhaps RT would have struggled on in an attempt to return the refinery to profitability. But the NT government having raised RT’s hopes with enough gas to run the plant at a lower cost, then replaced the offer with a solution that was impractical, expensive and poorly thought through. But in the meantime, RT had its people run the calculator over each of the offers, effectively bringing the decision forward by the fact that the offer was made.
RT showed its hand when it installed its Chief Financial Officer as the head of Gove. That was a sure signal to all stakeholders that the decision was a financial one only. Any pretence that there was still hope was dashed when RT didn’t bother to respond to the NT Government’s last ditched attempt to salvage the plant. The Chief Minister of the NT government flew to meet RT executives about 2 months ago. RT’s response was to send a letter to all employees warning that closure was imminent.
The newspapers reports of the announcement quoted RT CEO Sam Walsh as saying it was a sad day. A whole town that depended directly or indirectly on one employer now has nothing but some mining to rely on. This is one of the most remote parts of Australia, with no other industry around to absorb workers. Hopefully, RT will expand the bauxite mining operations to create a few more jobs.
Many of you would have read of the explosion in Qingdao last Friday. Authorities say at least 55 people were killed in the explosion, with another 136 injured and 9 still missing.
But the explosion could parlay into problems for the aluminium industry. The pipeline ran crude oil from Qingdao to Sinopec oil refineries in Weifang and surrounding areas. Weifang is about 170 kilometres from Qingdao.
Already Jinan refinery, Qilu refinery and Qingdao refining group have decreased output 20% to 40%, in the days since the accident. Each refinery will be impacted differently, according to how much inventory they had at the time of the accident. Sinopec is reportedly talking to some of the small independent refineries in the area to provide product for Sinopec customers.
The design capacity of the pipeline is max. 10mtpy. Of course, pet coke is a waste product for refineries, so output of coke will be impacted to differing degrees. It is still too early for an official timetable of repair and restart of the pipeline, but there’s no doubt it will be brought back on line as quickly as possible, to preserve jobs in the area.
The coker capabilities of major refineries which were influenced by this incident are: Cangzhou refinery with capacity of 1.2mtpy, Jinan refinery with capacity of 1.2mtpy, Qingdao refinery with capacity of 1.6mpty, Shijiazhuang refinery with capacity of 800ktpy, Shengli oil field with capacity of 400ktpy, Qilu refinery with capacity of 2.8mtpy and Qingdao refinering Group with capacity of 2.5mtpy.
We estimate the total output of petcoke from these refineries will reduce by a combined 284kt per month. This includes anode grade coke output of 130kt and fuel grade coke output of 154kt. In a country that produces about 24 million tonnes per year of pet coke, this is a small percentage, but anode coke is already looming as a potential shortage in the new year.
We will continue to monitor the situation. Subscribers to our reports will receive more information in our next editions.
(Thanks to AZ China’s Ji Yuan for compiling this information.)
Save the date! AZ China’s 4th International Aluminium & Carbon Conference will be held in Beijing next year and we look forward to seeing each of you there!
In 2014, we will be taking the theme “2020 Vision“, and asking speakers to give us their vision of what the global aluminium industry will look like by then.
New in 2014, we will also have a strong technical stream. We will also be looking to provide our audience with more opportunities for networking, without missing out on the best papers and presentations.
As we move towards 2020, China at last seems to be slowing the frenetic pace of smelter capacity expansions. Where just a couple of years ago, we saw new smelters announced almost weekly, now we hardly see any new announcements. Instead, some capacity has been idled, mainly in the traditional heartland of China’s aluminium industry. Is this the start of a new shift towards entering the global market on an equitable basis? Can we expect to see primary metal imports grow to the volumes predicted a few years ago?
We expect a lively debate on these and other issues. We will be making more emphasis on roundtable discussions, rather than one-way PPT presentations. We also have a fun event planned that will allow you to experience Beijing like you never have before.
The 2014 conference is sponsored by:
Rio Tinto today announced that it had abandoned plans to convert the Gove alumina refinery to gas, and is now reviewing the future of the plant.
The company blamed low alumina prices, a high exchange rate and substantial operating losses at the plant for the decision. But it stressed that no final decision had yet been made.
The Gove refinery is in a remote corner of Australia, with a single town of about 4000 residents almost solely dependent on the refinery for employment. Already the Australian labour unions are calling for federal government intervention to save the refinery.
The problem for the unions and all those who want to save the refinery, is that the causes of its malaise are largely outside of any government’s ability to fix. The natural gas solution would have been a good fix for the operating losses, but would require upwards of $500 million to provide a pipeline to bring the gas to the refinery. But market variables such as the exchange rate and the price of alumina could easily swing against the refinery again.
Perhaps some jobs can be saved by Rio expanding the bauxite mining operations there, though it appears to be just a matter of time before the refinery is closed. Likely Rio will not act now, just before Christmas, but the first quarter of the new year will be another story.
The focus for base metals and aluminium will be on China in the coming years, even more so than ever before. However, as China deals with structual change in the next 5 years, growth will slow compared to previous years. Yet that growth is likely to come less from exports and more from private consumption. The expansion of private consumption-led aluminium use, such as automobiles, consumer goods and packaging, will be an interesting area to watch. Essential infrasture building blocks such as power grids and electrical cables will also see an increase in demand due to government funding of intiatives such as the National Smart Grid program. The service sector in China will also be an area to watch in the next 5 years.
Overall, is our view for the outlook of China’s aluminium industry postive or negative?
Those of you who have purchased our 5 Year Outlook for China’s Aluminium Industry report already know the answer! If you have not yet purchased this 130-page indepth report, contact us today.
The 5 Year Outlook for China’s Aluminium Industry is the most comprehensive work available on the subject. For pricing information and detailed table of contents, email enquiries@az-china.com.
Reuters published an article a day or two ago that China’s industrial capacity utilization reached a 3-year low in the first half of 2013 and there is a tremendous amount of total capacity standing idle in China. One of the “bloated sectors” mentioned was aluminium. According to our BDM report, China’s smelters will have over 31Mt of capacity by the end of 2013 while production is expected to be around 24Mt. This 31Mt of capacity is estimated to have a utilization rate of 77% which is only slightly higher than the 74% average capacity utilization rate of industries in China.
Considering that over 63% of China’s smelters are operating at a loss based off of theoretical cash costs, some of these high-cost smelters will have no choice but to close in the next few years unless the aluminium price greatly rebounds. In the meantime, new capacity in Xinjiang, where there are lower power prices, will slowly replace old capacity. Once domestic capacity is restructured to lower cost regions, smelters’ cash costs should return to reasonable levels.
For more information about the China’s capacity and cash costs, email us at enquiries@az-china.com.
This blog reported back in 2011 about the law suit that Chenco GMBH, the Germany-based supplier of aluminium fluoride technology, took against Do-Fluoride, better known in the aluminium industry as DFD.
DFD is China’s and perhaps now the world’s largest supplier of aluminium fluoride to the aluminium industry. It has several plants in China, and the original law suit was based on whether DFD was liable to pay royalties to Chenco. According to the law suit, DFD had purchased a licence for one plant, but then went on and built additional capacity without paying Chenco for the technology. DFD in its defence claimed that the original technology had serious flaws, and that they had had to re-engineer the technology. Subsequent capacity built was based on DFD’s own re-engineered technology, according to their defence.
Links to our original stories on this are here and here.
Chenco eventually won that law suit, in May of this year. The International Chamber of Commerce Court of Arbitration ordered DFD to pay to Chenco:
- EUR 100,000.00 per month starting on 23 March 2011, and continue to pay such monthly penalty of EUR 100,000.00 on the 23rd of each following month, as long as DFD uses Chenco AlF3 technology, however, no longer than until 31 August 2016 (23 Mar 2011 – 31 Aug 2016 = 65 months);
- further EUR 320.000,00 as damages;
- interest amounting to 5 % p. a. on all claims and penalties awarded;
- DFD shall not use CHENCO’s technology until all aforesaid penalties are paid;
- Costs of the arbitral proceedings are payable at a quote of 15% by DFD and 85% by Chenco;
- all payments shall be net of Chinese taxes.
DFD moved to dispute the ruling in the Swiss Federal Supreme Court of Appeal, but subsequently withdrew the appeal.
According to the latest press release from Chenco, however, DFD have refused to pay the fines. Chenco has therefore sought to “domesticate” the ruling, by taking their claim to Chinese state courts. Chenco is looking to have China ratify and enforce the ruling. There is no indication as to when China’s judicial system will rule on this.
This is a very interesting case, on several levels. For us in the aluminium industry, it raises questions for buyers as to whether they continue to purchase from DFD in the knowledge of the law suit and the ruling. For DFD’s competitors, the same door opens - no doubt sales people around the world will be raising this question. But the question of Chinese company allegedly copying technology and being punished for it, and for that punishment to be enforced in China, will catch the attention of many companies around the world that face the same problem.
We will keep you posted on this.
The recent Communist Party Plenum illustrates the “wind-driven” nature of much of the commentary that surrounds events in China (and sometimes non-events.)
When the Plenum concluded last week, an official communique was released, which caused most (but not all) commentators to wring their hands and decry the lack of progress toward reform. Each word in the communique was dissected in a search for meaning, or double or triple meanings in some cases.
Then on Friday, a new statement was issued. The new statement listed a 60-point plan for economic reform covering everything from State Owned Enterprises down to the ownership of rural farming blocks. Immediately the commentators were full of praise, and astonishment. ‘‘The breadth of the reform plan has certainly exceeded most expectations,’’ commented Wang Tao, chief China economist at UBS. (Acknowledgement to Sinocism newsletter, from which I borrowed this quote.)
It reminds me of Australian poet John O’Brien, and his famous (in Australia) poem, “Said Hanrahan”. The farmers in that poem think alike, regardless what’s happening. Or to use a quote whose origins I don’t know, “When everyone thinks the same thing, there’s not much thinking being done.”
In amongst all the words written last week was one comment by a bureaucrat in the government agency responsible for the one-child policy. Here is a policy that one would think would have almost universal support, yet this bureaucrat pointed out that the policy change could take years to unfold. Every level of government, down to individual city and local level, must enact their own regulations, adjust processes and re-allocate departmental staff. And this is for a policy which has relatively little opportunity for personal graft or corruption, especially compared to some of the economic reforms mooted.
My point is, with the greatest will in the world, and with Xi Jinping cementing his power, and clamping down hard on dissent, even with the best legislative and economic minds working on rolling the 60 point plan, we are not likely to see any significant manifestation of those new policies any time within the next 2 years.
Take the old chestnut about urbanisation and the promise to deliver millions of new homes to the poorer echelons of Chinese society. According to Anne Stevenson Yang of J Capital Research, the actual number of apartments which remain empty is in the 10s of millions. That’s because over the last couple of years, the buyers have been SOE’s, and more recently Financial institutions such as banks. Anne’s latest newsletter tells of one cynic who said of one ghost city, “you can’t call this a ghost city - there aren’t even any ghosts here.
Overlaying a new policy on existing fundamental problems is like painting a house without repairing the timber.
Then there is the question of vested interests. In China, it’s always a good policy to agree. But not to act in accordance with that agreement. The fight on corruption in the party ranks is a good thing in itself, with more than 3,000 party members punished already, according to a recent statement. But we are talking about a business environment, indeed a society, where giving and receiving of “face” is ingrained. And there are countless numbers of people who are quite accustomed to receiving the gifts and perks of office. Not just in the behemoths like CNPC Petrochina, but in every city, at every level, and in every field there will be people who will agree to reform, as long as it doesn’t affect them.
So, while I am pleased to see that this plan was even announced, I doubt it will be the game-changer that people want it to be. And who knows what the next pronouncement will be, blowing the ship full of commentators in some new direction. Or as Hanrahan would have said, “we will all be rooned.”
China set a new record for aluminium production in October. With 1.95 million tonnes produced, that equates to 62.9 thousand tonnes per day. The previous record was set in August 2013, with 60 thousand tonnes per day.
The official data does not include “unreported production”, which adds another 200,000t per month to the total.
October’s production took the annual total to 18.1 million tonnes. At that rate, the year looks set to end at around 24.5 million tonnes, once the unreported production is added.
Smelters that had shut down mid year now appear to have resumed production. As well, new capacity is still entering the market, especially from Xinjiang province. New smelters don’t add too much in their initial stages, though their shadow extends long into the future.
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