Latest talk of aluminium cuts - Lessons from Trump

Several people have asked me what I think of the story running in the trade press about more capacity cuts in China’s aluminium industry. According to a story in UK-based Metal Bulletin and also run in Bloomberg and elsewhere, a meeting was held yesterday in China, and at that meeting it was agreed that if the metal price fell below RMB11500, smelters would cut capacity to prop up the price.

The people who made this announcement are taking lessons from Trump. Say what you like to get the desired audience reaction. Don’t let the lack of an agreement stop you from saying there’s an agreement. The facts should never get in the way of a good press release.

We understand that a meeting did indeed take place, but that there was no agreement reached in terms of actually cutting capacity. And why would they? The 6 companies said to be in the meeting were made up of those whose cash cost of producing aluminium is well below 10,000 (Hongqiao for instance) and those who have recently restarted capacity (Chalco for instance.) Why would a company that has just gone through the expense of restarting now turn around and agree to shut capacity?

More importantly, it’s the people who weren’t at the meeting that will have the most say. There’s no mention of Xinfa in the story, nor of many of the other leading producers, such as Tianshan or Nanshan. Between those three companies alone there’s more than 10% of China’s primary aluminium capacity. It’s highly unlikely that companies who weren’t even at the meeting are going to agree to a strategy they had no input on.

And why 11,500? Some commentators said that this had to do with the average cash cost of aluminium production, but the true average is well south of that. Not only that, for most of last year the metal price sat well below 11,500 yet we did not see any significant move on cuts until the price touched RMB10,000.

The unfortunate thing for the CNIA is that they have form when it comes to making brave announcements and press releases. We saw the talk back at the start of the year of a move to warehouse one million tonnes of aluminium in a bid to prop up the price. It turned out to be talk only - no action was taken, and it’s clear in hindsight that the plan was to put a brake on the sliding metal price, not to actually go ahead and warehouse any metal. Same goes with the production data, where the official numbers for February and March were clearly a fiction.

The fact is, China’s physical market price is sitting higher than the forward price, which is no wonder given the amount of restarted and new capacity that is coming in the next several weeks. This latest move is not much more than an attempt to keep the forward price from declining too much more.