National security aluminum – wrong fight

The world media has been awash with the news that President Trump has ordered an investigation into whether there is a national security threat angle in the USA’s imports of aluminum.   Several counties are caught in this investigation, but the main target is China.

Known as the 232 investigation, Trump’s action on aluminum follows a very similar investigation into steel.   The USA already has a complaint lodged with the WTO against China, but Secretary of Commerce Wilbur Ross says it is likely that the WTO action will be “subsumed” into the 232 investigation.

The National Security argument says that in times of war, the USA may not be able to get hold of sufficient quantities of high-purity metal for applications such as the F-35 fighter.  In times of war, no country wants to be dependent on another country for vital supplies.

But therein lies a problem.   According to our information, there are only a small number of smelters in China that make military grade aluminum.   And none of them are anywhere near a shipping point.   Chalco is the main supplier to China’s military, using metal from its Baotou Inner Mongolia smelter and Southwest Aluminum..  Zhonghe smelter also produces military grade metal.

The fact is, China is actually a net importer of high purity aluminum.   Really, it is quite embarrassing for China – the world’s largest producer of aluminum cannot make enough of these grades of metal for itself, much less to sell to anyone else.

Still, once an investigation is launched, there is no telling how the terms of reference might be amended or broadened.  But on the face of it, and to the extent of the information published so far, this appears to be the wrong fight for Mr Trump, if he is really interested in supporting the American aluminum industry.

AZ China’s WeChat group!

At AZ China we’re constantly thinking of ways to improve the service we give to our subscribers, that’s how the AZ China WeChat group was born.

We felt the need to give you even more precise information in a quicker manner and we came up with a concept that we believe is quite beneficial for everyone, because there’s nothing easier than opening an app to check out the news on the aluminum and carbon industry.

“How do I become part of this group you might be wondering?” Well, there are 2 ways, first one is FREE for all our subscribers as a complement to any of your AZ China’s subscriptions.

Second, is an option we give to those who aren’t our subscribers (yet) to be part of this group where valuable information is shared. You can purchase a subscription to this group for $400USD a year.

Given some confusion from our subscribers and non subscribers, we will be inviting our current subscribers to their corresponding groups BCR (Black China Report) or Aluminum. We’ve also created a test group, for those who aren’t subscribers yet and wish to be part of either group and want to test out the dynamic before paying the 400USD fee.

The instructions to join the test group are the following:

  1. Download the app (WeChat) from the corresponding App Store or PlayStore.
  2. Create an account
  3. Once you’ve created an account you go to contacts>Scan Qr Code and you Scan the following code


So again, if you’re already a subscriber you’ll receive an invitation to the corresponding group for FREE, if you’re not a subscriber and you want to join either of the groups, you can be a part of the test group and then pay the 400USD fee for the group you select.

If you have any doubts or questions don’t hesitate to contact for help or to enquire about the group subscription.

Third round of environmental inspections coming

In 24th April, approved by the CPC Central Committee and State Council, the third batch of central environmental protection inspection work officially started. Generally the inspection in each province will last one month from 24th April to 24th May, covering Tianjin, Shanxi, Liaoning, Anhui, Fujian, Hunan and Guizhou and focusing on understanding the provincial party committees and governments to implement the national environmental protection decision-making arrangements.


As the chart described, since last year July to now, there were three inspection teams distributed into 22 provinces to supervise local government to implement the environmental protection, however this is more powerful and totally different with the “2+26” which merely focuses on improving the air quality surrounding Beijing regions, covering Beijing, Tianjin, and individual cities in Shandong, Shanxi, Henan and Shandong.

If referring to the experience of other provinces in last year, it is likely all industry will be forced to cut or shut down by local government before the inspection. In early April, Hunan Nonferrous Chemical Company has excuse to perform maintenance to shut down but truly due to the inspection.

As for these 7 provinces, Guizhou and Shanxi are much more important, being rich in coal and bauxite, two kinds of main raw material to process aluminum. However, considering the current guideline to active energy market, I hold an optimistic attitude on the inspection on coal. As for other products, we can find in the next chart, with the exception of alumina, the proportion of anode and aluminum capacity these 7 provinces have is very limited. Even if in final they have to shut down or close, the impact for the whole market is acceptable.


At present, we have not found any alumina refinery to cut because of environmental protection problems. For current market, we still keep eyes on Shandong environmental protection and aluminium cuts.

In addition, China has 32 provinces excluding Hong kong and Macau. If the environmental inspection will reach hand to each one, apparently, Tibet, Xinjiang, Zhejiang, Shandong, Jilin, Sichuan, Qinghai, Hebei and Hainan should be in the name list. It is serious that the central environmental inspection will cross over “Heating Season Cut ” in major carbon and aluminium product regions.


March aluminum production too low

Based on IAI data, China’s March aluminum production increased from February’s 2534kt to 2707Kt in March.  But the daily production volume dropped from February’s 91Kt to 87Kt.   It was a drop of 4% in run rate.

Based on our pipeline report in March, the operating capacity was 37902Kt. Compared to February, it was an increase of 144Kt. Using the operating capacity to do the calculation, we can see March aluminum production should be more than 3000Kt.

Some 111Kt capacity was idled in March. Three smelters idled their capacity in March.

Due to the central environmental inspection, Linfeng Aluminum was asked to cut 30% aluminum capacity for two days.

Shandong Qixing curtailed all its alumina and aluminum capacity in March. They plan to restart 70Kt aluminum capacity at the end of May. They will spend around 1.5 months to do maintenance for 108x230KA pots due to the sudden power cut. They will spend another half year to do the maintenance for the rest of 70kt capacity potlines. They plan to restart 108 pots at the end of the year.

Guangxi Xiangji Aluminum reduced 500 tons of its operating capacity due to the high production cost in March.

In March, new capacity – either restarts or new pots – was around 255kt. The new capacity was larger than the idled capacity in March. We believe the production volume of 2702Kt from IAI was under-estimated.

In April, Xinjiang’s three smelters were asked to shut down its in-construction capacity. A document issued by four major departments had pointed directly to illegal aluminum projects. It is a clear signal that China will control its over supply problem. As soon as this document was released, Inner Mongolia Huomei Hongjun halted the construction of its 50kt aluminum project on April 19th by the impact of this policy. How much will the new policy influence on the April capacity?

If you would like to know more information about the China’s aluminum capacity, or about the cuts coming  under the new policy, please contact us to subscribe our pipeline report.


Reform supply. Will aluminum welcome the spring?

On April 15, Xinjiang Changji People’s Government decided to stop the advance of three enterprises in violation of the construction of electrolytic aluminum production capacity projects. Xinjiang East Hope Nonferrous Metals Co., Ltd. built 800,000 tons of electrolytic aluminum, Xinjiang Qiya Aluminum Co., Ltd with 800,000 tons, and Xinjiang Jiarun Resources Holdings Co., Ltd. built 400,000 tons.  On April 18, a new document entitled  “Rectification of electrolytic aluminum industry illegal activities program” began to spread in the industry. Following iron and steel and coal, the electrolytic aluminum industry supply side reform is also gaining pace. So what is the background of supply side reform? What will be the impact of the aluminum market? What is the expected future price? I will describe one by one.

First of all background, I think the main points are:

  1. Extreme mismatch between resources and production. China’s bauxite reserves account for only about 3% of the world’s total, but electrolytic aluminum production accounted for up to 54.6%, and China’s bauxite external dependence continues to increase.  If allowed to continue increasing, the risks to China’s resource dependency will also increase.
  2. Environmental policy needs. Most of the electricity used in China’s electrolytic aluminum smelting comes from coal-fired power generation.  According to the 2016 electrolytic aluminum production and the corresponding power consumption estimates, electrolytic aluminum smelting consumed 422.81 billion KwH, while China’s total coal-fired power generation was 39058 million KwH, meaning aluminum accounted for 10.83%.  This gives the electrolytic aluminum industry a large degree of influence.
  3. Supply and demand imbalance.   Aluminum processing industry operating rate are low. Since 2011, China’s electrolytic aluminum production capacity has doubled, with average annual compound growth rate of nearly 20%, but the terminal consumption growth is only about 7%.  It can be said that supply and demand imbalance is serious, although the electrolytic aluminum smelting enterprises operating rate is relatively high.   But the downstream profile industry operating rate averaged only about 60% level, has been far below the industry norms.
  4. Europe and the United States continue to pressure China. In recent years, with the continuous growth of China’s aluminum exports, aluminum and aluminum enterprises in Europe and the United States has felt a serious impact.  For trade protection considerations, Europe and the United States repeatedly bring anti-dumping sanctions against China.

I think this supply side reform will be stronger than any previous historical period, and may fundamentally change the current aluminum industry order and competitive landscape.  This top-down supply side reform is bound to push forward, and will eventually make sure that competition becomes the norm to drive market balances, which in turn will provide new opportunities for individual companies.

Price expectations, I believe that the current policy in some corners is to present positive news frequently to keep the price supported, but the fundamentals are still grim.  The implementation of the new policy still need a few months to buffer. So in the short term, aluminum prices will finish lower; the Shanghai Futures Exchange main contract will be supported at 13,500 yuan/ton, but in the long term, as the policy is implemented, aluminum prices may usher in a rebound pattern by the end of the third quarter and the beginning of the fourth quarter

More closures to come?

It seems likely more closures of smelters will occur later this year.  This follows the weekend’s disclosure that Beijing has ordered closures of 3 smelters in Xinjiang, for a total of 2 million tons of metal units.

According to some documents we saw, there is a 4-point plan coming out to weed out any remaining smelters that do not have the necessary approvals.

According to the documents, by May 15th, smelters must do a self-audit.  They are to submit a form to their local government.  By June 30th, the provincial government or the national SASAC group will do the checks. By September 15th, a joint operation of 5 different government departments will do special inspections using the results from smelter self-audits and the provincial checks, as well as reports from social networks and the media.

By October 15th, those same government departments  will provide supervision and guidance to ensure “rectifications’ are in place.

My personal experience in obtaining approval documents for a construction projection China is quite limited (one, indirectly – my experience is based on what my colleague Richard told me at the time when he was building a factory in Tianjin), but I can’t imagine that one can obtain approvals for:

  • Land use permits
  • Environmental impact assessments
  • Energy impact assessment
  • Utility planning
  • Construction permits
  • Project appraisal sign-offs, etc

inside 5 months, especially retrospectively.   From what we can tell, the plan is not to set out to punish and close unauthorized smelters, but to ensure that all China’s smelters are compliant on these fundamental approvals.   However, this document as we have seen it is a follow-on to the announcement on the weekend.

There is one essential difference between the weekend announcement and this document.  On the weekend, three smelters were specifically named.   This document does not name anyone.  On the other hand, it is applicable to every smelter in China.It seems likely that more closures are coming.  Based on the timeframe rolled out in the document, those closures will likely occur around the end of the year.

Internally we debated whether this move has any relationship to the pressures being put on China by WTO actions and by president Trump.   Finally, we think it would be too simplistic to connect those threads, however by putting this process in place it gives Beijing some easy handles to use should it be decided to close capacity to appease Trump or the WTO.  After all,  as we have told our audiences many times, Beijing has limited ability to force its own laws.   Talking the talk in Beijing is much easier than walking the walk.

We expect this document will become public very soon.

We will continue to monitor developments, and our clients and subscribers will be first to hear.