China Aluminium Q4 Cost Analysis

Throughout the last quarter in 2016, bulk commodities all presented strong prices, especially led

by black metal and nonferrous metal. Hot money flowed into the sector constantly with the support

of multiple positive factors like tightening freight capacity and limited supply. The difference

between the future price and the spot price for aluminium once exceeded 1.5 thousand yuan per

tonne. The bubble burst quickly, in the face of weakening demand, and as of December end SHFE

spot price closed at RMB12,800/t…

At present, although the aluminum market has entered into a weak season, raw material costs

remain strong in the near term:

• Coal. The coal market has been calm and market prices have shown slight declines recently

but still stood at high levels compared the previous year. As well, some smelters have delays

built in to their energy costs. The coal price rises of 2016 are still to be felt by some smelters

with 12-month supply contracts.

• Coke. Coal prices strongly stimulated the coke market, especially for high sulphur coke

products. However, the decline in product quality has led to a relatively tight market supply

and demand. Stable quality of independent refineries pushed prices constantly, and outpaced

the price rises from the big groups. During the Chinese New Year holiday, market supply

increases will calm prices, but that will be temporary. In addition, the Ministry of

Environmental Protection continued to strengthen environmental governance. Tough

restrictions and inspections will continue to push prices of carbon products.

• Alumina. As the second half of 2016 alumina output was limited, the market price continued

to rise. But as of the end of the year, the overall operating rate reached a high level. But after

the Lunar New Year, the primary metal market should face huge downward pressure, leaving

smelters more vulnerable to the high costs of alumina.

Overall, the aspect of raw material should sustain at high level in Q1 with weak aluminium market.

Low profits or even losses will occur, though it is too early to say whether that will cause some

smelters to exit the market.

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