Aluminum capacity – cut or not?

On April 15th, Xinjiang Changji People’s Government issued a notice on its government website with the announcement to stop Xinjiang Jiarun, Xingjiang East Hope, and Xinjiang Qiya’s illegal aluminum projects.

Led by Changji’s news, soon we saw similar documents issued from four major national departments – NDRC, MIIT, MLR and MEP – on cleaning up the electrolytic aluminum industry illegal projects.

Early May, very similar documents appeared from Shandong and Inner Mongolia on controlling the aluminum illegal capacity.

These documents created good market sentiment and the aluminum price showed strength as a result.

On May 18th, when National Development and Reform Commission (NDRC) spokesman Meng Wei explained why the coal production in some areas increased when government is taking the cutting capacity work actively, he said “cut capacity and cut production cannot be simply equivalent”.

Meng Wei clarified that cut capacity is to focus on removing the low-end, inefficient supply capacity, increase the effective supply, improve capacity utilization, balance the market supply and demand in this process. Cut excess, backward production capacity, orderly improve safety, cleanliness, efficient, low cost of high-quality capacity.  In reality, China is not so much cutting capacity as improving the quality of the capacity.

After this speech, Xinjiang Changji Government removed the announcement to stop three smelters illegal aluminum projects. In the meantime, Shandong and Inner Mongolia government websites no longer carry their announcements.

We have been saying for some weeks that it is premature to think that China is cutting capacity in any sort of meaningful way.  Our reading of the situation is that the process now under way is for Chinese smelters to get themselves legal.   Such a move tends to suggest that those smelters will stay in the market for a long time after going through the process of getting their approval documents.

How the Chinese government will deal with the illegal aluminum capacity remains unknown right now. At a minimum, projects currently under way that do not have the full set of approvals will most likely pause until those approvals are in place.   That seems to be already happening.   There is no sign that these approvals will not be given.



Similarly, projects that are now operating are being ordered to get their paperwork sorted.   That means no significant reduction in output.

Overall, it does appear that China’s supply structure is being moderated, but not necessarily curtailed.   That may change once the winter heating season arrives, but right now the supply side is bearish for metal prices inside China.  And excess metal will only feed semis exports, hurting prices outside China.

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National Carbon Trading Market and Aluminum

China will launch its  national carbon trading market in July.

Carbon trading is a market mechanism used to reduce global carbon dioxide emissions.  How to allocate the quota will directly affect the enterprise’s own operating costs and the enthusiasm of participating in the carbon market.

The basic principle of carbon trading is that polluters can purchase the emission reduction quotas from those whose factories perform under the national break point.  Carbon dioxide (CO2) is the largest of the 6 greenhouse gases that have to be cut, so the deal is calculated at tons of CO2 emitted per ton of production, so it is commonly known as carbon trading. Its trading market is called the Carbon Market.

According to the plan, the national carbon market will cover petrochemical, chemical, building materials, steel, nonferrous metals, paper, power, civil aviation and other 8 categories and 32 sub industries.

National carbon market electricity, cement and electrolytic aluminum industry quota allocation scheme announced recently in Sichuan carbon quota allocation trial training.

Electrolytic aluminum industry quota = aluminum liquid production x emission reference value, of which the reference value of discharge is 9.1132 tCO2/ton of aluminum liquid.

When the carbon emissions from electrolytic aluminum are calculated, the power consumption does not use the average emission factor of the regional power grid, and uses the unified national grid emission factor: 0.6858tCO2/MWh. Quota allocation in 2015 production as the benchmark, the initial allocation of 50% of the quota. When the actual quota is calculated, the actual output will be refunded.

We will lead you to find out how much production cost aluminum smelter will pay influenced by this new carbon trade scheme:

1 ton of aluminum consumes around 400kg-450Kg carbon anode.

1 ton of aluminum liquid will consume around 13,000KWH electricity.

(Thermal power consumption is differentiated based on different power generators).

Average 1 ton of standard coal can generate around 3000KWH electricity.

1 ton of aluminum production will consume at around 4.33 tons of coal.

Thermal power plants with one ton of coal generating an average of 2.62 tons of carbon dioxide by industrial boilers.

We can found out that 1 ton of aluminum liquid will produce 11.3446 tons of carbon dioxide.

The extra carbon dioxide is 11.3446-9.1132=2.2314 tons.

It costs around RMB20-30/ton for the carbon trade in the Carbon Market. If we use average cost with RMB25/ton to do the calculation, it costs RMB56/ton for aluminum smelters to pay the extra carbon emission to produce one ton of aluminum liquid. To produce 1 million tons of aluminum liquid, the aluminum production cost will increase around 55.8 million yuan.  China will produce about 34 or 35 million tons of aluminum this year.

We can see this carbon emission policy will increase costs for the aluminum smelters.

For the smelters who have good emission credit, they could sell their credit to those who exceed the  pollution limits. For those smelters who do not have good air pollution control equipment, they have to pay more to meet the government standard. Overall, it will increase the production cost for the aluminum smelter.

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China held its “One Belt, One Road Summit” from May 14th to May 15th. It was one of the most important international events Beijing held in 2017. About 1500 delegates including 29 heads of state or government from more than 130 countries and over 70 international organisations attended.

One Belt, One Road is abbreviated as OBOR. The initiative was launched in 2013 by China’s president Xi Jinping. It aims to revive the glorious past of the Silk Road, combining the Silk Road Economic Belt and the 21st Century Maritime Silk Road.

OBOR connects Asia, Europe, the Middle East and Africa together to promote trade and economic development. It involves 65 countries. According to Oxford Economics, countries in OBOR account for one third of the global GDP and cover around 60% of the world’s population. It was named as the National top level strategy for China and it was the major support for the current 13th five year plan.

In 2015, China Development Bank prepared around USD890 billion for 900 projects within OBOR. According to NBS, from 2013 to 2016, China’s enterprises have direct investment of over USD60 billion on OBOR. President Xi announced an additional USD100 billion will be funded in the OBOR initiative and encourage financial institutions to carry out RMB overseas investments, estimated to be about 300 billion yuan.

According to Chinese media, the OBOR Summit achieved 270 specific results, including international cooperation, policy communication, facilities connections, trade flows, capital circulation, and people connections.  There’s no doubt that the Chinese media were fully on board with the agenda.

The Chinese media has also been making the most of the contrast between China’s OBOR, and U.S. President Donald Trump’s trade protectionism views. Trump sent a U.S. delegation to OBOR, led by the White House adviser Matt Pottinger.

It is still too early to see the real impact from OBOR yet. We will update our subscribers with more information on OBOR and its influences on aluminum industry in our Aluminum Monthly Report.

As a side point however, we can report that many factories were ordered to stay closed before and during the Summit, including aluminum and carbon plants.   Beijing enjoyed blue skies during the conference.

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Outlook for aluminum prices this coming week

Last week,  news of Shandong Government cleaning up illegal aluminum production came out, but the content is disappointing.  The ambiguous description of the document didn’t give the market a jolt; aluminum prices only maintain a small  run, the SHFE aluminum prices rebound a little in the main aluminum futures contract after hitting 13500 yuan/ton mark, but the international LME aluminum price is better  back to more than $1900/ton.

Supply:  As shown below, until yesterday inventory of the five largest spot markets in China is 1.1 million tons, 122.5 kilotons less than last week.  The stock inflection point appears again and the aluminum inventory reduced again and may bring some support for the price of aluminum. But note that, influenced by the the lower price of alumina, costs of electrolytic aluminum smelting have decreased significantly.  Compared to the current price of aluminum, aluminum factories can remain profitable, so their production enthusiasm is high.It is expected that electrolytic aluminum production will remain high continuously in the future, supply pressure will not ease in short-term .


DATE Shanghai Guangdong Wuxi Hangzhou Gongyi Totally
2017-5-8 256 367 445 81 76 1225
2017-5-15 247 341 388 65.5 61 1102.5

Demand:  Early last week downstream processing market enthusiasm was high, but as the  aluminum  price chase the weaker levels, they began to doubt whether price rises will be sustained.  Delivery volume declined.  The overall consumption level is a little better than last week. Although consumption is slightly better than last week, affected by the news many processing plants are stocking up, not having real demand. Taking into account environmental factors, in the next week, aluminum consumption will be difficult to have a significant boost.

Policy:  The Chinese de-capacity policy dispersed, and the ambiguous attitude of many local government disappointed the market.   Recently the opening of  “One Belt One Road” Forum meeting brings new prospects for the future of aluminum industry investment. In the next week , The Euro-zone will release international trade balance, GDP and other relevant economic data, optimism is expected to be greater , while the dollar index is favourable for dollar-denominated commodity prices, including aluminum.

In summary, the current macroeconomic signals are good, though fundamentals are under pressure.  Under condition of no substantive progress from national policy, supply pressure and consumption are limited, the price of aluminum lacks power, and is difficult to rise sharply. In next week, the aluminum price is expected to rise first and then fall.  Aluminum main contract of the SHFE is running range 13700-14200 yuan/ton; international LME aluminum price will be maintained at US$1860-1920/ton .

Game theory and alumina

Yesterday, Chalco officially announced that they will shut down 970kt alumina capacity to ensure the benefit maximisation, or in other words to minimise “LOSSES”.  As reported before, it should include the alumina refining of Chalco Shanxi, which has annual capacity of 800kt. So how terrible is the market condition now?  In my personal opinion, the environmental protection push should be essential reason.

Of course, the tumble of prices should be the direct reason.  The average price of alumina had dropped by 24% from the top of this year but still with an increase of 16% y/y. Excluding the market factor, the main reason caused by the raw material-bauxite.

Since last year to now, the whole Chinese industry is experiencing the historical stringent environmental protection. For Shanxi province, we had mentioned in our blog that it is one the richest provinces in mining including bauxite and coal, and this is why it accounted for 26% of the alumina market now. But now, ore extraction is controlled by the environmental inspections and drove price up constantly. Meantime, the high inventory formed generally overwhelmed the market pulling the price down.

For alumina, by now there were two alumina refiners shut down parts of production line for ten to twenty days because of the environmental inspections. The cost to shut an alumina refinery is not as high as for a smelter, but it is still significant, so I wonder why they don’t stay shut long enough to allow the price to recover.

Furthermore, the supply-side reforming on aluminium industry has primarily finished in Shandong, Xinjiang and Inner Mongolia province, because vast majority of capacity and planned capacity is centred in these three province. But the final announcement merely sent a soft unclear message, in other words, it is that the limited expansion and current operating capacity is likely to be safe by now.

Hence, with the entire picture of the industry line, raw material up, practical strong demand  and shrinking output, it is a perfect timing to shutdown to cut losses.

Shandong’s action on Illegal aluminum projects

People are talking about Shandong cutting around 2 million tons of illegal aluminum capacity. Finally, Shandong issued the formal document regards to this topic with the title Notice on the Issuance of Special Action Plan to Rectify the Illegal electrolytic aluminum industry in Shandong.

This document was issued by four major departments in Shandong: Shandong NDRC, Shandong MIIT, Shandong MLR (Ministry of Land and Resources), and Shandong MEP.

We have gone through the document and found the content was nearly same as the control illegal aluminum project document issued by same departments, but in the national level.

There are two differences from Shandong’s notice compared to the Beijing document:

  1. Shandong’s notice did not repeat the words “Implement responsibility”. In the state document, it showed clearly that each province will take the responsibility to manage and control new capacity. If local enterprises have problems, the provincial government can deal with those problem following the relevant laws.

This might be the reason why Shandong had issued this notice, to show its attitude to follow the instructions from the top government.

  1. Another difference is the date differences for the rectify action.

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The timeline Shandong gave to local smelters should be long enough for them to make illegal capacity becomes compliant.

We did a calculation based on MIIT’s aluminum industry compliance list. Shandong Province had total of 6.6 million tons of approved capacity. Filings to Shandong Province come to 8.1 million tons plus around 1 million tons of replacement capacity. It showed there was around 2.5 million tons of illegal capacity in Shandong.

If we go back to check the historical information and found it was not the first time for China to issue notice to control the illegal aluminum projects.

In 2003, November 25, NDRC, Ministry of finance, MLR and other six ministries and the people’s Bank of China had jointly issued the document with the title Several opinions on stopping the illegal construction of the electrolytic aluminum industry and blind investment. It called for the prohibition on approval the aluminum and alumina project which could not meet the industry policy and development planning.

In 2011, between June 15th to June 30th, MIIT and other 8 ministries and departments did a joint investigation on 10 provinces’ without approval, but in aluminum construction projects.

In May 2014, Binzhou government released a document called Notice on carrying out the work of rectifying the illegal construction of the electrolytic aluminum industry in the province. It showed Shandong province did the illegal aluminum project control work in 2014.

In 2015, NDRC and MIIT issued a document which was a benchmark for the 2017 aluminum illegal project control action called: Notice of the Ministry of industry and information technology of the national development and Reform Commission on printing and distributing the opinions on the elimination of illegal items in iron and steel, electrolytic aluminum and shipbuilding industry. It gave clear instruction on how to deal with the illegal aluminum projects built after May 2013.

China had aluminum surplus problems for more than decade. MIIT tried very hard to control the illegal aluminum projects for years.

These actions to control aluminum capacity have been running since April.  As we know, some illegal construction projects had stopped in Xinjiang, though it is already clear that the rule is not being strictly followed.   We think the ruling for Shandong will not necessarily lead to a cut of 2.5 million tons.  We think that the plan is to get as much of the illegal capacity to become legal as soon as psosible.  Based on our calculation, China will continue with aluminum surplus supply issue in 2017.

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