Stockpiling – comparing 2010 with 2016

Six big aluminium producers - Aluminum Cop of China (Chalco), State Power investment Corporation (SPI – formerly CPIC), Yunnan Aluminium, Jiugang Group, Jinjiang Group and Weiqiao Aluminium & Electricity have agreed to set up a new company to handle a proposed stockpiling scheme. We understand Chalco recommended these 6 companies. The stockpiling program is underpinned by loans from the China Development Bank, with the Strategic Reserves Board (SRB) paying the interest. We understand the strike price for the loans is RMB 12,500/t.

It is not the first time that China’s aluminium industry has been bailed out by government. In 2009, the SRB purchased 700,000t, with the metal coming from the then biggest companies. The key difference between 2009 and 2016 is that the SRB is not taking possession of the metal. They are simply arranging working capital for the companies involved.

Back in 2009, the reasoning for the action was that the market needed a kick-start, following the trauma of the Global Economic Crisis. The SRB set a price of RMB12300 for its purchases, a price high enough above the then market price that the companies involved were able to fill SRB orders with imported metal. The aluminium price rose after the stockpiling and the aluminium market kept stable for around one year afterwards. But it could be argued that the stockpiling efforts of 2009 partially led to the problems that the market now faces. The accelerating price led more and more companies to commit to building new capacity. All those projects are now pumping out metal, adding to today’s over-supply problem. As well, the turnaround in the market led some smelter owners to regret having cut capacity in the first place. Five years on, and those same owners are now much slower in reducing output, not wishing to make the same mistake twice.

Will 2016 stockpiling truly be effective or not? Many smelters are questioning it and they are watching if they could gain any profits from it. Indeed, the temptation of free working capital would have been very attractive to most companies. AZ China will be publishing our latest Cash Cost Curve analysis very shortly, and it will show that most Chinese smelters are losing money, so they need the price to get back above RMB 12,000 urgently. But the stockpiling plan calls for it to start in February, and is only 1 million tonnes. It is not enough to cause any significant shift in market dynamics.

It is also interesting to see the change in names. In 2009, Henan Wanji and Henan Shenhuo were in the top 6, but don’t get mentioned this time. But in 2009, the world’s biggest primary metal producer, Hongqiao, was still only a small company, while Shenhuo and Wanji are now nowhere near the top producers.