CPIC: About Those Rumours…

Last week on this blog we mentioned a rumour doing the rounds, that there were to be some cuts to aluminium production. Here’s what we said:

“There are rumours that some SOE smelters are cutting production, but at this stage the rumours appear to be just that.” (Click on the quote to go to the original story.)

In the last 24 hours, those rumours grew legs, judging by the calls and emails I received last night. One news service even ran the story, stating that CPIC had announced a cut of 620,000t across three of their plants.

We checked around our sources this morning, and quite frankly there’s nothing out there, with one exception. CPIC’s Xinye plant in Qinghai is due to close some capacity due to some technical issues. This plant was built in 1999 and has a capacity of 575Kt. Although that plant has a high cash cost of production, at ¥13,500/t, CPIC still has another 2 million tonnes of capacity which operates at a higher cost than that.

Our contacts are telling us that the reason for the flurry of speculation is the same as in previous years – the producers are trying to spook the metal price up. It seems they had a very short-term success, but with the emphasis on short-term. On Thursday, Shanghai (AL1508) improved by ¥115/t, closing at ¥12,490. Today as at the time of writing, the market had slipped back to ¥12,415. As we have said here a couple of times recently, prices below ¥12,500 are severely testing the natural floor price – producers hoping for a pop in price would have been looking for the price to get well above this level.

As well, we have seen in the past what happens when “head office” announces a closure of a plant in some other part of China. A case in point is the Chalco Fushun smelter. Closure of that smelter was vetoed by the local leadership. Even if head office wants to close a plant, they have to get approval at the local level, and this isn’t easily obtained. Local governments worry about the effect on local GDP and the impact on local banks who may be forced to declare loans as bad debts if the plant closes. There’s also the matter of employment and jobs and the social impact.

Coming back to CPIC, it’s salient to remember that this company recently was merged with State Nuclear Power Energy company a month or two ago. Another rumour doing the rounds is that CPIC’s smelters, which were a tiny fraction of the total company and now an even smaller portion, were to be transferred to Chalco. So far, those rumours have not been confirmed either.

All this is not to say that something won’t happen – and certainly something should happen. The world aluminium market needs China to get back on a healthy and balanced footing. If any further news breaks about closures or idling of plants, we will let you know.

The feature image is of CPIC’s Xinye smelter, thanks to Google Earth.