China’s aluminum breaking Newton’s Third Law

According to Isaac Newton’s third law ‘When one body exerts a force on a second body, the second body simultaneously exerts a force equal in magnitude and opposite in direction on the first body’.

In China, the aluminum excess supply has existed for more than a decade. Local government used various policies to control the aluminum production since 2003. Although we have seen the real cut encouraged by the government, the cut volume is much smaller than the increased production number. 2016’s aluminum production was over 5 times of aluminum production in 2003. China’s aluminum production reached 50% of the world aluminum production in 2013. Using the real production data instead of the fake official data, China is now approaching 60% of the world’s aluminum production.

One would think that when a top Government body exerts pressure on the industry, that we would see a corresponding reaction. China’s aluminum industry is breaking Newton’s third law. China’s aluminum production just follows its own trend and continues increasing, almost ignoring what comes out of Beijing.

Since NDRC issued the document to control illegal aluminum capacity this April, Xinjiang Jiarun declared they will cut around 150Kt capacity by the end of this month, though so far they have only cut around 20Kt in April. Weiqiao declared they will cut 250Kt by the end of the month and they have cut around 100Kt capacity so far. Compared to around 4Mt illegal capacity base, the cut of 420Kt is really a small number. So far, we can see its effect mainly shown on creating the market sentiment and push the aluminum price beyond its fundamentals.

On June 28th, MIIT organised a forum including Chalco, SPIC, Shenhuo Group, Yunnan Aluminum, Weiqao, Xinfa, East Hope, Xinjiang Tianshan Aluminum, Jinjiang Group, Qiya Group and CNIA in Beijing. The major purpose is to understand the aluminum smelters’ operating status in first half. We understand there was some discussion about controlling capacity, but no specific decisions or actions.

We have two days left till the deadline for local government to address their local illegal capacity. The 420Kt mentioned earlier is the only news we received for cutting capacity so far.  We expect the metal price to correct next week, once market players realise that the cuts are not coming – not yet at least.

How much capacity will be cut in two days? How will the government further implement the illegal capacity control actions?  What will happen to smelters such as Weiqiao, who are receiving around 20 billion yuan comprehensive credit line from CITIC Bank?   Will China’s aluminum industry continue to defy the laws of physics, and the edicts of its government?

We will update to our readers and subscribers with the most up to date news.

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Reuters Forum Thursday June 29th

At AZ China we pride ourselves on the great relationship we have with the media, it is an honor for us to say that we’re one of the most trusted sources of information in the industry. As you may already know, we’ve been active participants on the Reuters forum for quite some time now and this Thursday won’t be the exception.

We will be following the next questions:

1. China’s aluminum production, ie what are the figures, where the misreporting is centered on? Is it just one company or is it widespread, and why now? Is the stats office compiling data in a different way ?

2. What are the implications?

3. For aluminium scrap imports.  Whats the story here, why is it coming to China ? Why are we seeing this suction of scrap and even primary ali in to China from overseas markets if the domestic market is so well supplied. Stockpiling ahead of winter?

4.  Alumina, it looks like Indonesia is going to take the place of Australia for sending alumina exports to China. It’s really a rapid increase in exports there, could you tell us a bit more about it?

5.  Bauxite imports – the ban on Malaysian exports was supposed to last until the end of June but looks like some companies are getting in early.. Why is there such a huge jump in imports?

For those of you who don’t know what the Thomson Reuters Global Base Metals Forum is, then let us tell you it’s rich source of news, market insight, analysis and discussion. Hosted by Reuters journalists, specialising in the base metals markets – you can chat, post questions, debate and exchange ideas directly with them, as well as industry contacts from leading global companies.

The Forum is free to join if you are a user of Thomson Reuters Messenger Premium. If you want receive more information on our reports, contact and get information on how to subscribe.


Outlook for aluminum prices this week

Last week, the price of aluminum pulled back from recent highs. Influenced by Xinjiang’s statistics of  illegal production capacity and Chinese Hongqiao’s announcement of cutting 250,000 tons of aluminum production, aluminum prices were up sharply at the beginning of the week, with the main aluminum futures contracts surpassing 14000 Yuan/ton.  But then a large number of investment institutions dropped funds and triggered a break.  Aluminum prices plunged.  Currently overall price operated above the moving average of the last 20 days. LME aluminum prices form a strong support in the vicinity of US dollars 1860/ton, putting the LME stronger than the domestic China price.

As shown below, inventory of the five major domestic spot market is up through last week.  In addition, production at some aluminum companies will increase.


DATE Shanghai Guangdong Wuxi Hangzhou Gongyi Totally
2017-6-19 245 288 400 84 72 1089
2017-6-22 263 291 460 92 78 1184

Demand side: Last week, the overall market demand was in deviation. Affected by the repeated sharp fluctuations of aluminum price, processing plants are tangled up in the market gyrations.  They are buying metal based on real demand, but are not sure whether the price will go down because of over-supply or up because of cuts to illegal capacity.   At present, only large processing plants with more than 100,000 tons of production are relatively stable; processing plants below 100,000 tons have varying degrees of reduced production lines. The overall consumption is not optimistic.

Cost side: this week the alumina prices is basically stable, but the price of pre-baked anode rose slightly. According to my estimates the spot cost of aluminum has reached 13437 yuan/t. Profit space has been further narrowed, but costs are providing further support to the market price.


News: Xinjiang Development and Reform Commission (NDRC) published ” Printing and issuing  the autonomous region notice of the special supervision plan for the cleaning and reorganization of the Illegal project of electrolytic aluminum industry”.  It’s a long title, but the scope is mainly illegal electrolytic aluminum projects constructed after May 2013.  China Hongqiao announced to cut production of 250,000t and so far has cut 100,000t.  The National People’s Congress (NPC) officially approved the environmental protection law and will implement it on January 1, 2018. The international market is relatively flat, CME crude index fell sharply, further testing  US$40/barrel position.

Taken together, the current market news is positive for price overall.  The next milestone for dealing with illegal capacity is closing soon, and we expect to see a flurry of activity in the next few days.  The overall consumption is still moderating and inventory is still increasing, so any cuts to capacity would have to be substantial to change the balance.

In the short term ,the aluminum price may be expected to rise affected by news, but weak fundamentals will drag strength from the price.  The main aluminum futures contract  of SHFE will run weakly at 13500-14000 yuan/ton. LME aluminum performance may be stronger than China aluminum prices, is expected to peak at $1900/ton.

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What pushed up the aluminum price this week?

Aluminum prices have performed meekly since May, as we entered the low season for demand. The average SHFE active price bounced around RMB13714 in the first half of June.

But the price suddenly rebounded and hiked to RMB13995 on June 20th. What caused the price rise and how long will it last?

On June 15th, the NDRC, NEA (National Energy Administration) jointly working with MIIT, Ministration of Finance, and MEP announced they would carry out special supervision on construction and operation of on captive coal-fired power plants start at the end of June.

NDRC and NEA gave a notice called Circular on Supervision and Construction of Coal Fired Self Owned Power Plants and Supervision on Operation and Transformation. The selected on-site investigations include Xinjiang, Inner Mongolia, Gansu, Guangxi, Jiangsu and Shandong.

The inspections will cover three areas:

  1. The planning and layout, operation and approval departments, the basis for approval, the licensing situation of the captive power plants in each province. Whether there is no approved construction; whether the approved construction does not match approval; whether the public power plant switched to self-imposed power plant illegally, and whether start construction when they do not meet the start conditions such as illegal construction and operation.
  1. Whether captive coal power plant commitment to social responsibility. It means whether they have paid the money they should pay.  It includes: whether to pay government funds and additional, policy cross-subsidy, system reserve costs and payment standards, payment time; reasons why unpaid, missed payment, less payment amount, start time.
  1. Coal-fired power plant discharge standards. It means how to implement environmental emissions standards.

 It includes whether the level of energy efficiency and pollutant discharge meet the relevant requirements and standards of the State; whether there is a super standard super-total emissions, whether the implementation of energy conservation, environmental protection, and elimination of backward production capacity and so on.

The inspectorate team will do in-depth on site view through random sampling or unannounced visits. There will be no less than 3 enterprises will be inspected in each province.

In China’s aluminum industry, lower power cost is the advantages for many smelters. In around 107 smelters in China, more than half of them have captive power plants. Calculated by operating capacity, around 82% of China’s aluminum capacity uses captive power plants. The average power cost for smelters with captive power plant is around RMB0.3/KWH. For those who do not have the captive power plant, the power cost will be higher and around RMB0.35/KWH in average.

We can see the importance of captive coal power plant to aluminum production cost structure for smelters.

In the aluminum production cycle, typically more pollution is generated at the power station than at the smelter. The inspections on major aluminum production provinces such as Shandong, Inner Mongolia, Xinjiang, and Guangxi will have some impact on the smelters. NDRC did not say how they will punish the captive power plants with problems, but because the edict mentions fees we wonder if a financial penalty will be imposed instead of shutting plants down.  However, extra charges will increase the production cost for the aluminum industry.

There is other news which influence the aluminum market beside this one.

In order to further improve the national pollutant discharge standards, China MEP decided to amend the “aluminum industry pollutant discharge standards” (GB 25465-2010), while revising “renewable copper, aluminum, lead, zinc industrial pollutant discharge standards” (GB31574-2015). It had more  emissions control measures.

On June 13th, MEP published the standard amendment as a draft for publication. They will collect opinions by June 22nd. The new emission standards will be implemented from 2017 October 1st in Beijing-Tianjin-Hebei 26+2 urban areas within the bauxite mine, alumina plant, electrolytic aluminum plant, recycled aluminum and other enterprises.

Aluminum industry’s emissions focus on mining, alumina production, electrolytic aluminum production, followed by material storage and transportation links.

In the new “Aluminum Industry Pollutant Discharge Standard” revision (draft), it gave emission control detail measures to the aluminum industry for their production process. The modification also requires that other effective pollution control measures may be taken with the approval of the competent environmental protection authority due to the safety requirements or special process requirements that can not meet the requirements of the emission control as stipulated in this standard.

This new aluminum discharge standard, plus last week’s Notice on the Implementation of Special Emission Limits for Air Pollutants in Beijing, Tianjin and the Surrounding Areas will surely increase more pressure to aluminum industry.

On June 19th, Xinjiang NDRC announced the special action on controlling illegal aluminum capacity in the period from June 20th to 25th. Since the second step of the NDRC’s aluminum illegal capacity check calls for local government checks with a deadline of June 30th, the local Xinjiang NDRC’s new document simply follows the order from top government. only Jiarun smelter has cut around 20Kt capacity in the time since the first announcement. How much Xinjiang will do in a week to meet the requirement from top government is questionable. In the meantime, we saw the aluminum price rebounded on Monday influenced by this news.

On June 20th, Weiqiao (known as Hongqiao) announced to cut 250Kt aluminum capacity. The cut capacity was mostly from its 240KA pots. It further increased the market sentiment. Aluminum price soon surged by the speculations on the day.

How serious the government will take actions on the captive power plant and what punishment MEP will gave to smelters broke aluminum discharge standard remains unknown yet. In the meantime, whether Weiqiao will truly cut its capacity is still to be seen. Aluminum demand remained soft in the low season. Without the solid support, it is hard to see the aluminum price will remain strong for longer term.

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Bauxite supply to be diversified in future

China’s appetite for bauxite and alumina is still growing, so it’s interesting to see what has happened since the days of Indonesia’s ban and the unlikely rise of Malaysia.   Guinea has now risen to be the big mover, replacing both countries.    For Weiqiao (also known as Hongqiao), they seem to have the supply problem solved for now, but it’s a broader question than for just one customer.

According to Customs data to April, volumes of bauxite imported to China increased by 9% y/y. Among them, Australia’s contribution kept 20% positive growth but Guinea rose sharply. Market share of Southeast Asia continued to shrink after Malaysia’s export ban. However, with the exception of Xinfa which expanded in 2016, imported volumes of main buyers all presented decreases (Yantai Jintai always supplied bauxite to Nanshan).


It’s a critical question for Chinese smelters.  How to ensure the normal operation when China is shortn ready supplies of bauxite?  The answer is to keep searching and finding other sources of supply. Lubei Alumina as a major alumina refiner has signed a long-term contract with Australia Metro and resumed the imported business with Indonesia. In addition, the restart of Qixing aluminium will boost the import of Malaysia bauxite. As for Nanshan and Chalco, Australia and Brazil might be the best choice.

Turing to domestic market, it also met multiple problems. Since April to now, mining business of coal, bauxite and fluoride were forced to control because of stringent environmental inspection. Shanxi province as one of the major three bauxite supplying regions has signaled insufficient output with purchasing price up. The local government is still carrying out rigorous inspections and there was no signal indicating mining business to resume activity. Although alumina price rally fast after the curtailment of Chalco, the operating rate didn’t resume at the meanwhile.

Overall, there is supply gap of bauxite either in the domestic market or imported products. As for latter, the market will be more diversified in spite of Guinea becoming the dominant player.