Word from our sources is that smelters in Henan and a couple of other areas are now making preparations for the imminent closure of up to 30% of their operating capacity.
Henan province has 5 million tonnes of primary metal capacity, so that means roughly 1.5 million tonnes of annual metal could be closed.
Our insiders tell us that the trigger point will be if the metal price hits RMB15000. If the pots close, it will be for up to 6 months. It is simply not wise to incur the cost of shutting pots, only to restart them straight away.
If this happens, we can expect:
* Metal price not to move too much. Why? Shouldn’t the metal price move up when the supply side shrinks? The market has already factored in a weak Q4 and Q1 2012, as can be seen by the backwardation situation developing in the Shanghai prices. As a result, traders are moving metal into the market to liquidate profits before the price falls. Yet again, it is an indication that Shanghai is not the major market for aluminium. Most aluminium is traded outside Shanghai, simply because traders don’t like to be in the same room as Chalco. But that’s another story. Metal price might respond slightly, but until there are some positive signs from the demand side, Shanghai is likely to stay in the doldrums.
* Alumina prices to fall. Henan province is also home to a lot of alumina refining capacity, so it’s likely there will be an immediate drop by both Chinalco and non-Chinalco plants. Imported alumina may take a bit longer to drop, since the importers won’t want to take a bath on the trade.
* Carbon prices to drop, especially anode grade petcoke, calcined coke and anodes. The market is already awash with coke.
* Cathode prices to rise. Typically, plants which have taken pots out of service will take the opportunity to reline those pots, especially if they are more than 2 - 3 years old. There could be a sudden jump in calls for 25% and 30% graphitic blocks.
* Smelter construction in the northwest to slow. Companies such as Henan Shenhuo, who are amongst the biggest producers in Henan province, will have reduced cash flow, and quite possibly a more phlegmatic view of the market than when they launched their huge project in Xinjiang province. They may elect to throttle back on the cash outflow if they have less cash inflow from their Henan plant.
* Few if any other smelters reducing capacity. Henan province is the highest cost province for producing aluminium. Smelters in Shandong province have already trimmed output in the face of high power prices. Smelters in Guiyang and Guangxi who have been impacted by electricity shortages are looking to get cash flow started. The rest of the market is likely to be glad that high cost metal has gone out of the market, and will wait and see if any further reductions are needed. 1.5 million tonnes is about one month’s supply of metal, so it’s a relatively big cut.
What’s more interesting is, what happens if the Government loosens the credit reins, and the Chinese economy rebounds? Those metal units won’t come back on overnight. Anyone who has actually had to restart a cold pot will tell you it’s not a simple matter of flicking a switch. We could see metal prices rise strongly in Q2 2012. It will be a great discussion at the AZ China conference in May next year.
We will post more information as we hear it.