Happy New Year of the Rooster

It seems not so long ago we were celebrating the New Year … oh wait a minute, we were.  This year, Chinese New Year is just a few weeks after Western New Year.

(It always puzzled me why it was called Spring Festival, since it was often snowing and there wasn’t a bloom or blossom in sight in Beijing.)

This coming year is the Year of the Rooster, which seems strangely appropriate in these times.

We at AZ China will be away celebrating with our families and loved ones, and will be back on deck Monday February 6.   We wish you all a very happy New Year of the Rooster.

Happy Year of the Rooster
Happy New Year of the Rooster

New patterns in aluminum price

At the beginning of 2017, aluminum performed an outstanding result. SHFE broke RMB14000 on January 25th and LME Aluminum was at an 18-month high of USD1839 in the same week.

Changjiang and LME 3 month

Last November, China’s aluminum price performed very strongly, driven by the impact of the speculative fund, environmental control and transportation policies. At that time, the LME price had the similar trend to China’s aluminum price, but LME growth was rather more modest. The arbitrage window opened last November and China’s primary import volume surged at the end of last year.  Chinese traders reported seeing Indian, Middle Eastern and Australian metal in the domestic China market.

Although China’s aluminum price started correcting itself early December, it rebounded at the end of December. The aluminum price has performed even stronger since the second week in January. Although most of China’s aluminum processing factories have closed for the Chinese New Year holidays and metal consumption has dropped, the aluminum price had a big rally.  A draft order calling for a 30% cut in metal capacity in provinces such as Henan and Shandong caused some traders to deploy the “Fear, Uncertainty and Doubt Factor” and push the future price higher.

In the meantime, the physical inventory increased 49.6Kt in two weeks. We expect to see the aluminum price will drop in February.

In March and April, when downstream factories reopen after holidays, aluminum demand will increase. The high raw material costs will also offer some support on aluminum price in first half 2016.

The surged LME price was mainly stimulated by the declining U.S. dollar after Donald Trump said it was too strong. The speculation funds flew to the commodity market.

The LME price was so high and the spread between LME and Changjiang had widened. The arbitrage window opened last December, but in the opposite direction compared to November. The spread between Changjiang and LME 3 month widened with average USD187 and it reached USD227 on January 10th. The opened arbitrage will be more beneficial for the semi exports.

Since LME was stimulated by the speculative funds, we expect it will remain strong under current Donald Trump’s revival of the United States view. In the meantime, with supply and demand remaining balanced outside China, our view is that the LME might reach the ceiling of USD1900, but it will meet the challenge to break it. Under the uncertainty of Donald Trump’s policy and international economy, LME will remain volatile in first half of 2017.

In the meantime, the LME and China’s aluminum price will affect each other and traders can always find its profits margin from the spread between these two prices.

If you want to keep in touch with us about what is happening inside the aluminum industry, please complete the contact form below, and we will add you to our mailing list.

December 2016 Aluminum Production

China’s aluminum production in December was 2891Kt, according to the IAI.   It remained flat with November’s daily production number.  It is a daily run rate of 93,000t per day.

If you subscribe to our weekly reports, you must have noticed the added capacity news from restarts and new projects in recent months.  Hardly a week goes by without 3-5 smelters restarting pots.  Based on our pipeline reports, there was at least 993Kt operating capacity increased from November to December. Despite all the extra capacity, there was no increase in reported production.

The key here is in the word “reported”.

When we checked the historical data, we noticed that in the last five years, December production has been low, but always followed by a jump in the following January.

We also noticed China’s February production volume was lower than January for the last 4 years running.  In many cases over the last several years, the output in March also jumped, though in a couple of cases it slipped back.

There are several possible explanations for this apparent cycle of “reporting low then high”.   It could be that in the winter months and over Chinese New Year, the relevant people at the smelters cannot be reached.   It could be because the CNIA is using a cycle starting not at the start of the month but perhaps “25th t0 24th” of each month.   It could also be because some people do not want to report too high coming into the end of the year, so deliberately bump some production back a month or two.

The least likely reason is that it is really true and correct.

 

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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Portland Smelter will restart

We mentioned the Alcoa smelter at Portland Australia smelter might receive a big amount of subsidies with $240 million from the Australia Government last week.  As part of $240 millions, the Federal Government had announced they will provide $30 million to Alcoa as a secure package for Portland.

A week later, on January 20th, Alcoa announced its Portland smelter will restart and they have received a four year deal with energy provider AGL to secure steady power supply. The new four years power supply contract with AGL will start in August, 2017 once the current power contract expires. Although Alcoa did not release the details of the contract, the Portland will be safe for another 4 years.

Before the power failure, Portland smelter was running at 85% of is nameplate capacity with 358Kt. They only ran 30% after the power outrage. They plan to run the capacity prior to the outrage and it will take them six months to restore the production.

When Portland face the close risks after the power outrage, the local government tried to save the Portland smelter because it is so important to the local community. At least 2000 direct and indirect jobs have been saved when Alcoa announced the restart plan.

The announcement of the deal to save the smelter comes just as the USA launched an attack on China’s aluminum industry, accusing the Chinese government of giving subsidies.

WTO action reports – Paul’s comments

As most readers know, I am still on vacation, far from the world of aluminum and carbon – or at least so I thought.

Reports this morning in Reuters, Bloomberg and the New York Times (they are all claiming the story is theirs), have prompted me to put down the pina colada and pen a few thoughts.   Here’s my two cents worth.

Comments from Paul Adkins, Managing Director AZ China Ltd, on the news reports of a WTO action to be launched against China’s aluminum industry.

First up, it is hard to comment without seeing the details of the action, indeed there is no action until it is lodged.   The various reports say that the action will commence as early as this week.

When it comes to WTO action again China’s aluminum industry, there is a history going back to 2010.   Back then several Chinese aluminum companies were affected by tariff penalties.  But look at how the Chinese aluminum industry and its exports have grown since then.  In 2010, China produced 16 million tons of primary metal; in 2016 that number has more than doubled.  Exports have also exploded, so if the intent back then was to curb China’s enthusiasm for exports, it didn’t work.

2010 was also the time when certain analysts and commentators were confidently predicting that China would be a net importer of as much as 5 million tons of metal per year.  Perhaps buoyed by those predictions, the international smelting community has had to go through a painful re-alignment of its sales forecasts.

The USA and other countries support their aluminum industries, and we have just seen the Australian government offer support to Portland smelter.   The Alcoa smelter in New York State receives support from the local government.  Please refer to the previous post in this blog for more information about that.

The WTO action apparently includes allegations of unreasonably low interest rates on loans, but Chinese interest rates are higher than the USA.  If interest on loans is a problem, it’s in the non-payment and continual rolling over of debt.   The news reports also talk of low cost electricity and alumina, but electricity costs in China are higher than many other parts of the world.   Some 6 or 7 Chinese provinces provide rebates on electricity bills to some smelters in their jurisdictions, but this is no different to other governments around the world providing subsidies for the huge amount of electricity consumed in aluminum smelting.   Alumina costs are also the same or higher in China than in other parts of the world, and it seems difficult to substantiate a claim otherwise.

The USA may well be successful with a WTO action, but at what cost?   The USA sells more aluminium to China than the other way around, thanks to the scrap volumes, and the two sides could well get into a “tit for tat” fight. There’s the risk of China banning imports of aluminum products from the USA to China as part of a tit for tat fight – I wonder how Boeing would feel if it were not allowed to sell its aluminum products to China?

We are only days away from a new USA president, and his policy appears to be more regressive than the present administration’s.   Likely the new President will want to score points and show he means business, but this could be a very dangerous fight, as many USA companies rely on low-cost Chinese metal for their fabricating shops and factories.   Costs of making aluminum products in the USA will rise, and that could well lead to China selling finished aluminum products to the USA instead of semi-finished products.

In any case, the real problem in China’s aluminum industry is not the subsidies going to smelters.  It is the semi-finished sector that is more over-capacity.   Some of that over-capacity is supported by government policy – e.g. zero land tax, help with labour costs or local taxes, and the formation of industrial zones with attractive benefits for companies looking to establish a factory in those zones, but the natural structure of aluminium prices in China lends itself to a lower semi-fabricated cost.   China wages in semi-fab factories are much lower than in the USA, and China doesn’t pay the inflated delivery premiums that US consumers pay.

Even though primary aluminum is more usually expensive in SHFE than LME, by the time the metal is at the semi-fab stage, the total cost is lower, even after exporting.   The contribution from governments to this lower cost is minimal, if you consider only the “additional” help from government over and above the help given by other governments to their local industries around the world.

At the Antaike conference in November, the president of the US Aluminum Association gave a speech calling for cooperation between the two sides on this issue.  A WTO action will likely sideline the AA, or force them to abandon these calls and resort to supporting their constituents.

AZ China takes no sides in this fight.   But our clients want us to explain the implications and likely outcomes, so that they can make informed decisions about investment or trading.

Contact Paul Adkins at paul.adkins@az-china.com for more information.