Excerpted from AZ China’s March Aluminium Report:
Money never sleeps: The continuation of liquidity and credit market impotence
Global growth is full of uncertainty, which means there is no bull market for base metals for a while. In terms of inflation, there is a fair chance that inflation is created in the process of global money printing. This may occur when recovery gets a firmer footing, which will “benefit” base metal prices. But it is an artificial benefit – the same total production costs more to buy, but also more to make, especially if inflation causes wage spikes. So no extra demand or supply, only higher costs. That’s hardly a long-term benefit or benefit at all.
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Perhaps we are finally seeing the much-needed correction to the supply side of China’s aluminium industry.
In the last 3-4 weeks, at least 4 smelters have announced cuts to production. Total capacity cuts amount to 450,000t on an annualised basis.
It started with less than a trickle. The first to switch off pots was a tiny plant in Henan province. They cut 25,000t, being half their capacity – never mind that such small plants were outlawed several years ago.
But this week, at the same time that the SRB has moved to buy 300,000t, another 3 plants have advised of cuts. Assuming these pots remain cold through the rest of this year, it should equate to just under 300,000t for 2013.
Interestingly, 2 of the 4 plants were receiving subsidies from their local governments, but those have now stopped.
These cuts also come at a time when other new plants are turning on pots, especially up in the north west of the country.
We forecast at least 500,000t of cuts in this year’s envelope. China needs that level of supply side correction just to get the inventory levels down sufficiently. Demand side improvement is unlikely to be strong enough to do all the heavy lifting.
We continue to monitor the situation, and will bring you news of other cuts as soon as we hear of them.
No, AZ China has not joined the NCAA. But luckily for those of you who aren’t basketball fans, you can still take advantage of a little bit of March madness with our March promotion. Email firstname.lastname@example.org with the promo code “NCAA” and new subscribers will get two months of any of our regular reports listed below for free:
Weekly Carbon Report
Weekly Aluminium Alert
Monthly Black China Report
Monthly India Report
Monthly Aluminium Handbook
In the next week or so we’ll also have some great promotions on a few other new services and products we’ll be introducing to the market. Stay tuned!
Long positions powered by optimism are pushing the LME higher. However, risks still exist in the global economic system. Some of these risks include the US fiscal situation, the European structural malaise, the Chinese structural dilemma and the potential shocks that may arise from unlimited money creation. The price outlook for 2013 remains flat to marginally positive. Production ex-China may remain negative for another 5-6 months, and we will see the cuts to reduce. This is reflective of the return of final demand. Further data points from the demand side are needed to confirm a recovery scenario. It may very well be that the market is currently driven by an irrational sense of optimism as there is a tendency to overestimate price gains before recovery.
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The Black China Blog was recently named as one of the 50 best blogs to learn all about China. A very nice recognition! There are a few other very interesting blogs on that list as well for anyone interested in China.
AZ China has also been featured in the Sept/Oct edition of Aluminium International Today (AIT). Paul wrote an article entitled “How technology saves the Chinese aluminium industry”. The article covers just how far China has come since their first prebake smelter in the 1970’s. More info about AIT’s magazine can be found on their website.
We just finished another monthly session with Thomson Reuters. They offer an online forum for base metals, a special service where traders, bankers and analysts can log in to gain instant access to the latest news, trends and opinions.
As a regular guest in their base metals forum, AZ China answers questions about what is happening inside the China aluminium market. In today’s session we covered subsidies, how much farther the metal price was going fall (and as a result the possibility of closures), an update on capacity expansions, invisible inventory, China’s long-term strategy in terms of Indonesia’s export changes, and production trends.
AZ China is delighted to be able to offer this additional service in conjunction with Thomson Reuters. Join the discussion next month via the Base Metals Forum. For more information, email firstname.lastname@example.org