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