China’s aluminum breaking Newton’s Third Law

According to Isaac Newton’s third law ‘When one body exerts a force on a second body, the second body simultaneously exerts a force equal in magnitude and opposite in direction on the first body’.

In China, the aluminum excess supply has existed for more than a decade. Local government used various policies to control the aluminum production since 2003. Although we have seen the real cut encouraged by the government, the cut volume is much smaller than the increased production number. 2016’s aluminum production was over 5 times of aluminum production in 2003. China’s aluminum production reached 50% of the world aluminum production in 2013. Using the real production data instead of the fake official data, China is now approaching 60% of the world’s aluminum production.

One would think that when a top Government body exerts pressure on the industry, that we would see a corresponding reaction. China’s aluminum industry is breaking Newton’s third law. China’s aluminum production just follows its own trend and continues increasing, almost ignoring what comes out of Beijing.

Since NDRC issued the document to control illegal aluminum capacity this April, Xinjiang Jiarun declared they will cut around 150Kt capacity by the end of this month, though so far they have only cut around 20Kt in April. Weiqiao declared they will cut 250Kt by the end of the month and they have cut around 100Kt capacity so far. Compared to around 4Mt illegal capacity base, the cut of 420Kt is really a small number. So far, we can see its effect mainly shown on creating the market sentiment and push the aluminum price beyond its fundamentals.

On June 28^th, MIIT organised a forum including Chalco, SPIC, Shenhuo Group, Yunnan Aluminum, Weiqao, Xinfa, East Hope, Xinjiang Tianshan Aluminum, Jinjiang Group, Qiya Group and CNIA in Beijing. The major purpose is to understand the aluminum smelters’ operating status in first half. We understand there was some discussion about controlling capacity, but no specific decisions or actions.

We have two days left till the deadline for local government to address their local illegal capacity. The 420Kt mentioned earlier is the only news we received for cutting capacity so far. We expect the metal price to correct next week, once market players realise that the cuts are not coming - not yet at least.

How much capacity will be cut in two days? How will the government further implement the illegal capacity control actions? What will happen to smelters such as Weiqiao, who are receiving around 20 billion yuan comprehensive credit line from CITIC Bank? Will China’s aluminum industry continue to defy the laws of physics, and the edicts of its government?

We will update to our readers and subscribers with the most up to date news.

Picture Reference: https://www.wired.com/2013/10/a-closer-look-at-newtons-third-law/