China’s Lianghui and Aluminum

China held its important Lianghui or two sessions (National People’s Congress and Chinese People’s Political Consultative Conference in Beijing) starting March 3^rd.

One of the most important sessions of the NPC is the Premier’s Work Report. Premier Li Keqiang announced in his Report that China sets 2017 economic growth target at around 6.5% with optimism that this will be exceeded. The 2016 GDP target was between 6.5%-7%, while actual GDP was 6.7%. It was the slowest growth in 26 years.

In Lianghui, China’s Ministry of Finance announced 2017’s financial expenditure will increase to 19.5 trillion yuan Almost US$3 trillion). In the meantime, 23 provinces in China have published their 2017 investment targets on fixed asset in March. The total amount has exceeded 45 trillion yuan. Most of the investment plans were for infrastructure construction and the transportation industry. If 45 trillion yuan investment will be approved, it means 2017’s economic growth will be driven by the government expenditure again. It also means it will create lots of business opportunities for the aluminum industry in China.

Also at Lianghui, the National Development and Reform Commission (NDRC) announced they are targeting to cut 150 million tons of coal capacity this year(a fraction of 1%). The target for cutting steel capacity is 50 million tons. The cutting thermal power capacity target is 50 million kilowatts. Although cutting the aluminum capacity has not been mentioned by NDRC during Lianghui, the cutting capacity target for coal and thermal power will have some impact on the aluminum industry. Thermal power accounts for around 30% of China’s aluminum production cost. Coal as the major raw material for thermal power, the continue cutting capacity on coal will made the current high coal price remain in high range. The higher cost of energy will support aluminum prices in 2017.

The Government work report made “innovation to lead the real economy transformation and upgrading” as one of the key tasks in 2017. The specific measures include to enhance scientific and technological innovation capacity; to accelerate the cultivation of new industries; vigorously improve the upgrading of traditional industries; continue to promote public entrepreneurship, innovation; comprehensively enhance quality levels. It’s not a difficult extension to see that if this policy is applied to aluminum, the industry will gain from beneficial policies and rulings.

Although aluminum did not get specifically mentioned during Lianghui, there are conflicting policies at present that still need resolution. The 13th 5-year plan calls for primary aluminum capacity to achieve 80% utilization, yet the recent air pollution regulations call for a 30% cut to capacity. Our view is that the air pollution regulations will get priority. The 5-year plan target can still be achieved in the coming years.

Those stakeholders in the USA and elsewhere who have been pushing for China to cut capacity, especially in relation to its exports of semis, will be disappointed if they were looking for a signal from Lianghui that China is listening.

Picture Reference: www.xinhuanet.com