Environmental inspection – Coming again

 

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The Ministry of Environmental Protection (MEP) has proposed measures in a draft policy document aimed at curbing the deteriorating air quality around key cities such as Beijing, Tianjin and the surrounding areas. The draft rule includes a total of 28 cities in Shandong, Henan, Shanxi and Hebei provinces.

Yesterday, it was announced that the first 2017 inspection will officially start 15th February and last for one month. This could be an important litmus test of the new draft rules.  If the inspection team implement the rules mentioned in the draft, we can see coal, alumina, aluminium and carbon industry will all have a major restriction. However, the extent of the impact is dependent on how strict the inspection is!

Since July last year, the first round inspection started in Henan Province.  Almost all carbon producers were seriously affected  or even shut down. In the following months, Shandong, Inner Mongolia, Hubei, Chongqing and Jiangsu all saw inspections and had some factories closed. It’s a good thing that the authorities are acting to improve the air pollution.  The not-so-good outcome caused by the inspection is market disorder – supply shortages pushed mainstream price up hundreds of yuan. High price does not mean high profits or healthy market condition. Manufactures are frightened by endless inspection and endless policy requirements.

To make matters worse for producers and market participants, China’s annual “Liang Hui” – the annual week-long meeting of Parliament – will take place in March.  It’s likely that some measures will be put in place to ensure blue skies during that week.

What we heard from carbon factories is they don’t know what the central and local governments will do in the new round of inspection.  But producers really want to understand and accept if they indeed have the right levels of pollution treatment equipment. Most carbon plants were able to return to full production following last year’s inspections, except in Gongyi where they are still under limitation.  The carbon plants cannot afford to spend capital on new equipment if the government is going to change the rules.  They can’t afford the capital, and they can’t afford to be shut down again.

Hopefully, the inspection teams will bring clarity and consistency to the producers and therefore to the market. Meanwhile, it will be a substantial and effective way to improve air quality.

Outlook for aluminum prices this coming week

Last week was the first week after Spring Festival.  SHFE aluminum’s main contract is supported strongly around ¥13,500 per ton; while the overall LME aluminum price was above the average, and it has a larger bounce than the Shanghai aluminum price.

At present, from the supply side, the output of electrolytic aluminum during Spring Festival was around 700,000 tons according to the capacity of 37 million tons in China. Owing to the holidays of many aluminum bar factories, the direct selling of aluminum liquid drops to around 50%. If so, the output of casting ingots was around 350,000 tons, but there was only 165,000 tons delivered to the spot market, and most of the remainder stayed at smelters and railway stations. At present, there are only about 260 train sets in Xinjiang, and the backlog of ingots are more than 350,000 tons until now. Although the shadow inventory makes a breakthrough of 1.1 million tons, the amount of the truly delivered ingots only maintains at 700,000 tons, the reported inventory does not cause any stress to the supply side.

From the demand side, some large and medium aluminum factories did not have any days off during Spring Festival, meaning they worked through their raw materials without being able to buy replacement material until the market re-opened.  Now they are actively purchasing aluminum ingots. In addition, according to my investigation, most of temporary shut-down small factories said that they would resume production after the 15th of the first month of the lunar calendar (Lantern Festival) after Spring Festival. It is also to say that the aluminum market starts to boost and makes a good deal at the time that people return to work after Spring Festival.

From the macro news side, at the beginning of 2017, there were many proposals and briefings of national-level “electrolytic aluminum  supply-side structural reforms”, “environmental inspection de-capacity”, and large amounts of speculative funds seized this opportunity to hype, leading the aluminum price to rise. While in international markets, the first two copper mines in global scale met with strikes and export sanctions in succession, worrying the short supply of copper market. Copper, as a “weathervane” of non-ferrous metals, whose sharply rising price drove the price of other related metals up, such as the metals represented by aluminum.

In conclusion, although it is the slack season after Spring Festival, a large drop of aluminum prices will not occur, influenced by many factors. In consideration of those factors simmering, the aluminum price will continue strong in the next week. It is anticipated that SHFE aluminum price main contract will be strong at RMB 13,500-14,200 per ton; and LME aluminum price will be USD1,830-1,900 per ton, but does not exclude the possibility of the breakthrough of USD1,900 per ton.

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