Monthly Archives: July 2011
In the previous post, I talked about how the FUD factor - fear, uncertainty and doubt - is affecting aluminium prices.
Much the same argument can be made about petroleum coke and calcined coke prices.
Readers of our monthly Black China Reports will know that calcined coke prices in China are sitting in the low- to mid-$400 range. They have been almost unchanged for a couple of months now. But this level is nowhere near the mid-$500 prices in the USA or Europe, nor the $600 prices in India.
With an arbitrage situation like that, one would expect that buyers would be flocking to China to pick up bargsins.
But it hasn’t happened, for two reasons. Chinese producers don’t have vast amounts of spare capacity available, especially at bargain basement prices.
But equally, buyers are dealing with the FUD factor. A move to China CPC is fraught with danger. Buyers are worried that as soon as they switch, CPC prices will rise above US prices. It has hapened before.
At the same time, international sellers are not blind to the benefits of the FUD factor. As price negotiations for the second half drag on, those buyers who point to Chinese prices and ask for a reduction are being told, “Go right ahead and buy from China at that price - if you dare.”. They know the history of Chinese CPC as well as buyers do.
The real sting is in the tail,however. That invitation to go ahead and cancel orders and buy from China comes with one condition… Don’t come back expecting us to have coke for you when the Chinese eventually let you down.
The CPC market is not the relationship-based club it used to be.
We expect that CPC prices will remain disconnected for at least the rest of this year. For more information on calcined coke prices, contact AZ China.
Decades ago, IBM sales people used to sell mainframe computers (I am talking back in the days when computers filled entire rooms), based on the FUD factor. “Of course, you could choose not to buy IBM…” they would say with raised eyebrow.
The FUD factor is Fear, Uncertainty and Doubt, and if you were a buyer of mainframe computers, that’s exactly what you had to face in the buying decision. Were you brave enough to step away from the safety of IBM?
Today, the FUD factor is at work again in China’s aluminium market. Shanghai spot aluminium prices have risen 5% in the last week, largely due to the market fearing that shortages of the light metal were imminent. Power shortages, delays to start-ups of new smelting capacity, government actions to eliminate old inefficient capacity, and an expectation that the economy was still on track in all the key consumption sectors, all combined to create fear in the market.
In fact, the fear has been rising progressively in the last few weeks. The market has been in backwardation since June, a reflection that longer term, the sector is likely to be in balance.
The question is, has the market really got something to worry about? We think there is a certain amount of over-reaction in the price. There have been some delays to new smelters, thanks to a shortage of building materials in Xinjiang. But the electricity shortage has so far not seriously affected supply to the market, and with the price so high, smelters across China are gearing up to extract every tonne of metal they can, and maximise their profitability.
AZ China will be examining the situation in more detail in our next monthly report, due out the week after next.
It’s Friday, it’s raining. What else to do but muse on less important issues.
A reader has pointed out to me that the people in the new photo atop the blog look like industry insiders. I hadn’t considered this, but now that I look again, it is clear that Tim Potter has made an appearance, and seems to be leading Princess Karen to some little nook. But who is that in the rotunda? Could it be Howie?
Who do you think these people are? Any other suggestions?
And what might the man and woman be saying to each other? Please send me your ideas of their dialogue.
Here’s a couple of ideas:
“I am sure the hotel is in this direction…”
“Trust me, I am a pet coke trader….”
This has little to do with aluminium or carbon, but I pass it on, as I know many of you out there in the aluminium and carbon worlds work harder at your business than you do at looking after yourself.
We buried my friend Chander today. Chander was a brilliant businessman, but more than that, he was a wonderful, generous human being. Chander was originally Indian (though he was actually born in Pakistan), but has lived in many parts of the world. He came to China a few years ago with an idea to develop high-end electronics for automobiles - specialised ignition systems, for instance. His business was very successful, and he won export orders from car manufacturers around the world.
A few weeks ago, he sold his business to an American firm. They were due to take it over last Monday. Chander popped over to India for a short trip, palnning to be back in Beijing in time for the hand-over. During the flight however, while everyone was asleep, Chander suffered a stroke. It was only when the attendants tried to wake him for landing that they realised that he was unconscious.
Chander remained in a coma from last Sunday, 10 days ago, until 2 nights ago. The hospital was keeping him alive using all sorts of machines, and when I saw him, I couldn’t recognise him. But two nights ago, his heart gave out.
Chander was a heavy smoker, and loved a drink. He did not look after himself, and would drive 100 metres to buy a coffee, instead of walking. We all spoke to him at various stages, urging him to take better care of himself. But he loved working, and loved his life. He was due to turn 50 later this month.
We all spend too much time working, flying here and there, in meetings, doing emails, writing blogs. Let’s not lose sight of the fact that the only person responsible for achieving balance in our lives is us. Life’s too short as it is, without cutting it short through our own negligence.
Picked up a small story in the Montreal Gazette, which reports that Rio Tinto Alcan’s smelter in Alma Canada is experiencing problems with excess iron and silicon in the metal.
The newspaper story focuses on the (temporary) loss of jobs for about 60 workers. The workers are from the pot relining centre, and are being laid off because the equipment they would normally use for pot relining is being diverted to address the impurities problem.
That is interesting. The equipment normally used in the relining centre consists of jackhammers, tamping guns, molten iron heaters and crucibles and overhead cranes. I am no specialist, but my guess is that it is the cranes that are being diverted. First of all, not much else in relining can be useful in solving an iron/silicon problem. Second, I suspect that the potrooms people need to make use of extra crane time the daily cycle.
Iron and silicon can’t come from too many places. One obvious source is the anode, but they should be able to isolate and identify that without needing to use equipment from the relining centre. Another and more likely source is the alumina itself. The problem with getting impurities in your alumina stream is that it’s hard to divert out of the problem. You need a lot of alumina and a whole alternate delivery system, depending on how your alumina silos are configured.
My guess is that the cranes are being used to deliver top-ups of high purity alumina into the pots. If you are doing that, then your crane time goes up exponentially, and you’ve no time for anything else.
The article says that metal production levels are unaffected, only the quality is a problem. But if the pot relining centre is down for two weeks, then one hopes that there isn’t a failure of more than a few pots in the next 4 - 5 weeks.
The fact that they expect to work their way out of the problem in 2 weeks tells me it’s an alumina problem.
But I am no smelting specialist. If you have better information or knowledge, please send us a comment.
Reports are coming in of a major fire at a Petrochina refinery in Dalian. The fire is apparently still out of control. More details later.
We have been talking about the huge expansion of primary aluminium capacity in Xinjiang province for some time now. In the long-term, we expect that province alone to have more than 10 million tonnes capacity. We even thought that the first of the bigger plants would start coming on stream as early as this year.
But while we, and presumably the companies involved, had assessed that the key ingredients - alumina and electricity - would be sufficient to cover, we failed to look at another key ingredient.
Our sources tell us that the new 800kt smelter that Xinjiang Xinfa is building has been delayed until next year, because of a shortage of building and construction materials. Anyone who has been inside a potroom knows that you need thousands of tonnes of concrete for the base, hundreds of steel shells for the pots (this smelter will have near 1,000 pots), and thousands of steel girders for the building. Xinfa simply has not been able to obtain sufficient metals to maintain their construction schedule.
I guess they are competing not only with other smelter projects, but with the countless public housing and other infrastructure projects going on in the area.
China’s National Bureau of Statistics has announced that June’s production level was 1.59 million tonnes, making for a daily average output of 53,000 tonnes. This is a jump of 7% over May’s record production level, and puts China on target to meet or exceed our prediction of 18.5 million tonnes for the year.
This level of production has come about because of China’s high price on the metal, which is currently trading at close to RMB18000 per tonne (US$2780). At that level, most if not all of China’s smelters are running at a profit. (Contact us if you want more information about China’s true cost of aluminium - as opposed to the numbers that some analysts would have you believe.)
Despite new records being set for output of metal, Shanghai inventory levels are still well down on where they were just a few months ago. The Government’s actions on credit tightening have led to a lot of de-stocking in the supply chain, but the positive sign is that with inventory and demand where they are, the metal price is set to stay high, which is good news for producers.
One rider on all of this is that the NBS numbers are often incorrect - though so are most of the official numbers. NBS is usually lower than the real figure. We should have a more accurate number by the end of next week.
China’s economy grew by 9.5% in the second quarter compared to a year ago, according to figures released by the National Bureau of Statistics this morning. That compares to 9.7% in the first quarter, and 9.8% in Q4 2010.
The world’s media is reporting that this is a worrying slow-down, but our view is that growth is still extremely good. Despite tightening of money supply, and an aggressive campaign to reduce inflation, the economy is still growing above the rate that the Chinese Government set as a target.
Fixed asset investment grew by 25% in Q2, a sign that infrastructure projects are still going ahead, despite recent concerns about bad debt levels. Industrial output rose by 14.3% in the first half, while retail sales grew by 16.8%. These numbers need to maintain strong growth, especially relative to fixed asset investment, for the economy to continue its transition out of an investment-led situation.
Both these latter figures have the potential to continue fuelling inflation, but the root cause of price increases is not the industrial or retail consumer, but the imbalance in China’s trade terms, and the artificially weak currency.
Still, an announcement like this morning’s, showing a reduction in GDP of 0.2 percentage points, will be enough for the bears to come out and proclaim that China is heading for a hard landing. I guess if they stay short long enough, eventually they will be right, but it’s not going to happen in the short or medium term.
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