Aluminum capacity - cut or not?

On April 15th, Xinjiang Changji People’s Government issued a notice on its government website with the announcement to stop Xinjiang Jiarun, Xingjiang East Hope, and Xinjiang Qiya’s illegal aluminum projects.

Led by Changji’s news, soon we saw similar documents issued from four major national departments - NDRC, MIIT, MLR and MEP - on cleaning up the electrolytic aluminum industry illegal projects.

Early May, very similar documents appeared from Shandong and Inner Mongolia on controlling the aluminum illegal capacity.

These documents created good market sentiment and the aluminum price showed strength as a result.

On May 18th, when National Development and Reform Commission (NDRC) spokesman Meng Wei explained why the coal production in some areas increased when government is taking the cutting capacity work actively, he said “cut capacity and cut production cannot be simply equivalent”.

Meng Wei clarified that cut capacity is to focus on removing the low-end, inefficient supply capacity, increase the effective supply, improve capacity utilization, balance the market supply and demand in this process. Cut excess, backward production capacity, orderly improve safety, cleanliness, efficient, low cost of high-quality capacity. In reality, China is not so much cutting capacity as improving the quality of the capacity.

After this speech, Xinjiang Changji Government removed the announcement to stop three smelters illegal aluminum projects. In the meantime, Shandong and Inner Mongolia government websites no longer carry their announcements.

We have been saying for some weeks that it is premature to think that China is cutting capacity in any sort of meaningful way. Our reading of the situation is that the process now under way is for Chinese smelters to get themselves legal. Such a move tends to suggest that those smelters will stay in the market for a long time after going through the process of getting their approval documents.

How the Chinese government will deal with the illegal aluminum capacity remains unknown right now. At a minimum, projects currently under way that do not have the full set of approvals will most likely pause until those approvals are in place. That seems to be already happening. There is no sign that these approvals will not be given.

Similarly, projects that are now operating are being ordered to get their paperwork sorted. That means no significant reduction in output.

Overall, it does appear that China’s supply structure is being moderated, but not necessarily curtailed. That may change once the winter heating season arrives, but right now the supply side is bearish for metal prices inside China. And excess metal will only feed semis exports, hurting prices outside China.

Picture Reference: https://www.techknow.org.uk/