Aluminum – don’t be too optimistic

China’s aluminum price at 14000-14500 yuan/t is a result of shutting illegal production, notwithstanding weak demand. Many research institutions also predict further rises; some even predict that aluminum prices will continue to rise and break through 17000 yuan/t. But I think that although policy side of cleaning up illegal production can be expected, yet the new capacity additions should not be ignored. We should not be overly optimistic about the metal price.


1.There is no doubt that cleaning up the illegal production capacity has achieved some effect, but the practical reduction of output remains uncertain

The Chinese government has issued 13 policy documents since it began to regulate and control the electrolytic aluminum in 2012. The general tone of the 13 documents is to defuse overcapacity and control new increments. But electrolytic aluminum built capacity still increased from 30,000 KT to 44,000 KT in that 5 years.  It is obviously that the previous regulatory policy did not get the expected effect. Contradiction between central policy and local economic development has intensified. This time, the regulations convinced the market of the strong determination of the central authorities, especially after the illegal capacity reduction of  Xinjiang Jiarun, East Hope, China Hongqiao,  and Shandong Xinfa. The market has no doubt about the implementation of this policy.

Over capacity cutting has also achieved a series of effects. But according to our statistics, the capacity of illegal production this time is 4000 KT, compared with industry spontaneous reduction of 4000 KT in 2015. The 2015 reduction was because aluminum enterprises were not optimistic about the aluminum prices in future, while this reduction is occurring despite high prices and a buoyant outlook.  It means if the central authorities don’t maintain a high level of supervision and control, the affected smelters will look to offset the orders as quickly as possible. Beijing does not have a good track record at supervision and control at a local level, and local governments are not keen to lose tax revenue or sources of jobs.


2.Under weak demand conditions, the current price of electrolytic aluminum is inflated; aluminum factory profits is already high

Domestic spot market inventory has reached 1.26 million tons, and has grown consecutively for 5  weeks. Consumption is in industry off-season. A large number of small domestic downstream processing factories are shut down because of the environmental protection supervision. The contradiction between supply and demand has become increasingly prominent. But because of the illegal capacity shutdowns, the aluminum price rose instead of falling.  Smelters are now running with a cash cost profitability on average of around 10000 yuan/t, with some smelters making as much as 3000 yuan/t.


3. The “illegal capacity” policy aims to streamline the industry’s development, not to spurt prices.

In the coal and steel sector, the supply side reductions led to an improvement in industry realised profits, but prices soared faced with repeated regulation. On July 17th, the NDRC held a conference to further arrange coal supply guarantee work.The conference mentioned that the expected net growth of the effective capacity  this year is around 200 million tons, to curb soaring coal prices. For electrolytic aluminum supply-side reforms, we believe that the purpose is still to clean up illegal capacity and standardise the industry, so the central authorities will want to suppress prices soaring. Strongly-rising prices are not conducive to the production and business activities of enterprises. In addition, illegal electrolytic aluminum production capacity is extremely advanced in technology and energy consumption. As a result, after their work is finished, we believe shut-down production  capacity will re-enter the market after getting compliance sign-off.


  1. Do not ignore new production while staring at over-capacity reduction

According to our statistics, the net increase in production capacity of China’s electrolytic aluminum is 2.14 million tons, even after the illegal capacity closures. In addition, after a number of projects such as Mongolia Huayun, CHALO Huarun, Mongolia Chuangyuan and so on put into production in the second half of year, there will be millions of tons of new incremental capacity.  Even taking into account the illegal capacity and Winter Heating Season cuts, there will be still 1 million tons of net increase production in the next 5 months. In addition, we can not rule out that the NDRC will modify some of the rules, or that some capacity forced to cut might get an exemption.

Overall, although Chinese cleaning up illegal production achieved certain effects, yet the progress is still slow. The current rise of aluminum price is only based on expectations of full adherence to the policy. There is no substantive improvement in the demand side, so we should not be too optimistic. Do not ignore new production while staring at over-capacity reduction. Aluminum price between 14500-15000 yuan/ton is very high. If all the illegal production capacity is shut down, the price may have the power to chase up to 15000-15500 yuan/ton, but if that happens we will be looking at a substantial fall.  But we are looking at a fall even at the current price levels.

More cuts announced

On July 17th, just before the future contract transferred from 1707 to 1708, the SHFE active aluminum price surged to RMB14500.

Xinjiang Jiarun had shut down all its illegal 150kt aluminum capacity by the end of last week.

Xinjiang East Hope has shut around 180 pots with around 250kt capacity.

Today, we received the confirmation that Shandong Xinfa will shut down 530Kt of aluminum capacity due to they do not have the Environmental Impact Assessment (EIA). If you subscribed to our weekly report, you will see Shandong Xinfa has around 1.1 million tons of high purity aluminum project has no EIA. Currently Xinfa declared they will close around half of this capacity. We believe they will wait and check what the top government will do to them once they started closing these pots, before they continue with the balance of illegal pots. In the meantime, we believe they are trying very hard to get their environmental assessment to be approved now.

Since 2013, many provinces in China said they will not approve new aluminum projects, so how easy Xinfa can get their paper work approved is unknown, but we know it will a very difficult process.

As well, Shandong Weiqiao stopped purchasing prebaked anodes for its 300KA pots. Shandong Weiqiao’s two plants with 300KA pots did not meet the environmental standard. They may have to shut down these two plants with around 420Kt capacity. Although Weiqiao did not say they will close these plants, the stopped purchasing of anode is a clear signal.

As China’s largest aluminum production province, Shandong has now cut 1.2 million tons plus Weiqiao’s previous 250kt cut. That is a big number in China from one province.

The cut from Shandong plus last month’s cut from Xinjiang Jiarun and East Hope, we believe China is taking the aluminum supply side reform seriously this time. If China will take the cut capacity seriously, the illegal capacity in Inner Mongolia will also face closure risks. At that time, we will see aluminum price remain in high range this year.

If you would like to know more about the aluminum cut in China, welcome to subscribe our monthly report. We will introduce more information to you about the recent capacity cut in China.

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Bohai Aluminum Industry Forum

On July 6th-7th, the Yangtze River Delta/Bohai Aluminum Industry Chain Development Forum was successfully held in Binzhou in Shandong province. Nearly 400 representatives from more than 10 provinces attended the forum, holding joint discussion of aluminum industrial development plans.

This forum received vigorous guidance from CNIA, China Nonferrous Metal Processing Industry Association and People’s Government of Binzhou City. It was also assisted and supported by China Hongqiao group, Shandong Innovation Group, Gelangjisi (Shanghai) company, Jiangyin Xin Ren Technology Co. Ltd., and Yong Jie new materials stock co, Ltd. AZ China was invited to attend the forum as a contributing media.

Zhang Bo, President of  Hongqiao Aluminum, Vice president of China Nonferrous Metals Industry Association and president of Binzhou Aluminum Industry Association was a speaker and contributor to the conference. Du Ping, vice mayor of Binzhou city, Xu Guotao, deputy director of China Nonferrous Metal Processing Industry Association and president of Shanghai Aluminum Industry Association, and Zhang Jilin, vice chairman and secretary-general of China Nonferrous Metal Processing Industry Association, also contributed speeches in the forum.

Numerous other important people, including Cui Lixin, vice chairman of China Nonferrous Metals Processing Association and executive vice president of Binzhou Aluminum Industry Association, attended the forum. Zhao Qianfang, Yuan Yongda and He Faping presided over the forum.

Zhang Bo gave a speech saying: “As an important centre of the Yellow River Delta and the Bohai rim region, Binzhou has become an important production base of aluminum in China and even in the world. After more than 10 years of development, its aluminum industry cluster has formed industrial layout of  coal-power-aluminum integration, upstream and downstream integration and global integration. On May 24th … the people’s Government of Shandong Province issued a notice fully supporting Binzhou and other places to build high-end aluminum industry clusters.

Zhang Bo pointed out that Binzhou Aluminum Industry Association and the Shanghai aluminum industry association have a strategic cooperative relationship, and with close exchanges and co-operation between the two associations and their members. In the future, the two parties will further play the role of bridge and link, providing full support and help for entrepreneurs to integrate into the development of the aluminum industry in both places.


Du Ping is making a speech

Du Ping ,Vice Mayor of the people’s Government of Binzhou City ,said in her speech, Binzhou aluminum industry started in 2001, after more than 10 years of time, quickly developed from ” sparks of fire” into “a prairie fire”, and formed an aluminum industry cluster that is leaded by the Weiqiao group, and supported by Innovation group, Mengwei group, Bohai pistons, Huajian aluminum and other key enterprises. Binzhou has thus become an important aluminum production base of the country and the world.

Du Ping pointed out that, at present, the capacity of city’s aluminum processing has reached 8000kt. The main business income of the city’s aluminum industry in 2016 is 270 billion yuan. In recent years, Binzhou aluminum industry gradually has formed 3 large bases: Zouping, Binzhou economic and Technological Development Zone and Beihai Economic Development Zone, and has became an aluminum industry circular economy industrial clusters with high degree of aggregation and full chain, the aluminum industry currently has a total of 1 National Enterprise Technology Centre, 6 Provincial Enterprise Technology Centres and 6 Municipal Enterprise Technology Centres.


Zhang Jilin is making a speech

Zhang Jilin, vice chairman and secretary general of China Nonferrous Metal Processing Industry Association pointed out in his speech, the Yangtze River Delta is one of the core area of China’s aluminum consumption , and is also an important place of China’s aluminum processing technology and equipment level, product quality and new application development of high aluminum. Binzhou has developed into the largest aluminum industry cluster both in our country and in the world, and the development advantages are outstanding.

Zhang Jilin pointed out that, in 2016 consumption of China’s aluminum is about 32 million tons, the consumption of per capita is 23 kilograms.  Per capita aluminum consumption has not yet reached that of the United States, Japan and European countries, so there is still much growth room for China’s aluminum consumption. In 2016, China’s aluminum production increased by 9.7%, main business income was 1.1 trillion yuan, profit was 59.6 billion yuan, Chinese aluminum processing industry is very healthy and upward, aluminum processing is still with a bright future.


Visiting Huajian Aluminum

During the forum, the leaders and guests visited workshop of Huajian Aluminum. Huajian Aluminum is jointly funded by Weiqiao Pioneering Group, Shandong Innovation Group and Huajian Aluminum.

Outlook for aluminum prices this week

Last week the price of aluminum maintained a high trend.  After news of Xinjiang Jiarun start cutting production and the Ministry of Industry and Information called the 10 major aluminum enterprises for a meeting, the aluminum price stepped back into rebound channel, but the main futures contract price met heavy resistance at line of 14000 Yuan/ton, and ultimately failed to break through.  LME aluminum price was stronger than that of China’s aluminum prices, rising steadily, and successfully broke through  US $1900/t.

At present, the supply side: as shown below, at the start of the week  inventory of the five major domestic spot market is total 1197 tons, 13 tons more than last week. In addition, in this week, Hongqiao and Jiarun both reduced production, so the dynamic supply was slightly decrease. If the performance of overcapacity cutting policy can not be enforced, the pressure of China’s aluminum price will only increase.


DATE Shanghai Guangdong Wuxi Hangzhou Gongyi Totally
2017-6-22 263 291 460 92 78 1184
2017-6-29 261 289 476 91 80 1197

Demand side: this week because the financial institutions are in half-year audits, primary aluminum enterprises face great pressure, while under tight cash flow, downstream processing enterprises have to reduce purchases, resulting in serious oversupply.  In  Shandong market even continues to offer discounts of 160 yuan/ton. In addition, according to my research, this week, polarisation between large processing plants and small processing plants is obvious.  Large factories (annual production capacity more than 100 thousand tons) have sufficient orders and also easier to access bank loans, so their production is in good condition.  However small processing plants (capacity under 30 thousand tons) are in worse, because of less strength and industry off-season together with little favor from financial institutions.

Cost side: this week alumina prices are basically stable, part regions have slightly lower amplitude around 10 yuan/ton, but the price of pre-baked anode rise again. According to my estimates, as of Monday spot cost of smelter has been up to 13469.8 yuan/ton, up 32 yuan/ton since last Friday. Fortunately, the spot price is strong, most of electrolytic aluminium enterprises are able to remain profitable, but profit margins are narrow again.



Taken together, the current supply and demand is not optimistic, under  the premise of slowly overcapacity cutting of the Chinese government while new capacity emerged constantly in Mongolia, Shanxi, Guangxi, Guizhou and other places.  In the short term, the oversupply situation is difficult to be changed.  The market’s attention is mainly concentrated on the local government’s announcement of illegal capacity verification results following the June 30th deadline. In addition the rising integrated cost of aluminum enterprises formed strong bottom support of aluminum price. In conclusion, under the effects of long-short intertwined, it is expected that aluminum price is still difficult to have a breakthrough next week, the news may boost short-term rise, but  will be constrained by the weak fundamentals. Main aluminum futures contract of SHFE will operate at 13600-14100 yuan/t.  LME aluminum will hover around the $1900/t line.

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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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.