Monthly Archives: January 2011
As we approach the year of the rabbit here in China, the Chinese people are embarking on their annual pilgrimage back to their home towns and families.
Many people have had to leave their jobs up to 10 days early, simply because there aren’t enough train tickets to go round. One young lady we know of finally had to share a car with friends for an all-day drive back to her home town, after trying for a week to buy a train ticket.
(I am being pedantic when I say ticket, and not “a seat on a train.” That’s because most trains now have standing room as an option. So you can travel in the First Class compartment the whole way, just so long as you don’t want to sit down.)
The average journey last year across Chinese New Year was 14 hours.
According to some reports, a record 230 millon people will make a total of over 1 billion trips in the next two weeks. The Government really has painted itself into a corner. There is no way that the holiday period can be split, and with so many millions of internal immigrants all looking to get home for their only annual vacation, the public transport system cannot cope.
Chinese New Year is pretty much like Christmas. Substitute the fables about mangers and virgin mothers and three wise men (which isn’t many, given the total population must have been over 1 billion even back then), with fables about ancient emperors and special foods for good luck or fireworks to drive away demons. Chinese families have this time for getting back together, sharing a meal or two, exchanging small gifts (thankfully, the idea of big expensive gifts hasn’t caught on yet) and reminiscing about the year gone past.
The coming year is the Year of the Rabbit. The rabbit is a lucky creature, though the luck comes in fits and starts, according to the legend. The rabbit hops forward, but every now and again stops to look around (and gets overtaken by the Tortoise, but that’s another fable).
Your humble blogger will be sharing a New Years Day meal with his Chinese wife’s family. We will eat Tofu, since that also brings good luck (better still, good fortune to the sellers who pocket the windfall) and various other treats, washed down with Chinese beer.
We will also spend each evening for the next two weeks listening to interminable fireworks on every street corner (they have already started.) As I mentioned, fireworks are meant to scare off any demons. This city must be riddled with devils, if the number of fireworks is any guide. Seems to me that for the thrill of a few moments of dazzling light and deafening sound, it’s a pretty good deal for the fireworks sellers, and a very busy time for all the Emergency Rooms around Beijing’s hospitals.
China Nonferrous Industry Association has published their estimate of the December production level, putting it at 1.25 million tonnes. That puts 2010 at 16.2 million tonnes, according to their data.
As we have said before, the problem is that CNIA misses some smelters. In 2009, we estimated they missed something like 1.0 to 1.2 million tonnes in their published figures. We had that suspicion substantiated by the big two alumina importers, both of whom told us that their estimates were also that much higher.
We know in 2010, they have not reported at least two major smelters. Any smelter which does not go through the normal approval channels with the Beijing authorities is given the cold shoulder. Weiqiao and Xinfa fall into that category.
Let’s look at alumina apparent consumption for a clue. According to Antaike, in 2010, China produced 31 million tonnes of alumina, and imported another 4.1mt. That’s a total of 35 million, from which we can take 1 million tonnes for non-smelting applications. 34 million tonnes of alumina should produce 17.7 million tonnes of primary metal.
We spoke to several smelter managers here before they all went on holiday for Chinese New Year, and the consensus view from our straw poll was that the real number was around 17.5 million tonnes.
This begs the question, which number does the metal balance and metal price reflect? Remember that prices are an outcome of supply and demand. It’s true that visible inventory has fallen - it is down by 14% on its mid-year high. In that same time, metal price has risen by 10%, and is still below where it was earlier in the year.
However, it is not always a good idea to use the market as a measure. One indication of that was that the metal price fell when the December production numbers were released. December’s monthly total was slightly higher than November, so the market did its usual knee-jerk.
We spoke to some commodity analysts here in Beijing. Their view was that the price increase of recent months was due to financial deals coming back into favour, soaking up metal and causing the open market price to rise.
And that’s the big problem here in China - it’s impossible to measure apparent consumption because it’s impossible to get a read on exactly how much metal is off the books. But then, it’s impossible to be sure of the real production numbers as well, since CNIA doesn’t tell the full story.
One message in the mess - be careful of stories that say that China’s aluminium output grew by 25% (or any other number.) Of course, you can take CNIA’s 2009 number and compare to its 2010 number and see a change of 25% (12.9 up to 16.2mt), but how do you know if the unreported smelters’ output stayed the same across the two years? (Actually, some went down, others went up for a near-zero change).
At the end of the day, there isn’t a lot of point chasing the point about real versus published production. We know what the real production was, and we know what the published number was, and we will keep tracking both.
As for our predictions, we went into the year estimating that 2010 would hit 17.5mt (published, not total). We revised that number in the wake of the smelter shutdowns mid-year, to 16.5mt. We were out by 300kt.
Much has been made in the foreign press about the Chinese breaking copyright, pirating, and generally claiming other people’s ideas as their own.
But the biggest victims of pirating by the Chinese are not only the music or film companies, the high tech companies or others that you hear about. The Chinese themselves are the losers.
In the last couple of years, there has been talk about new cathode technology being developed in China. The idea behind the concept is to reduce ACD* and thereby reduce DC current consumption. The way to do this in the eyes of the inventor was to create an additional channel across the cathode.
I am not an expert, but in my mind this idea is not supposed to work. The last thing you want on the floor of your reduction pot is channels where bits of anode, molten metal and gunk can all collect. But Chalco has more than 300 pots in operation using the new channel design, with some pots already chalking up their first birthday. Such is the success of the concept that privately Chalco are claiming to have reduced DC by 1000kwh.
That’s all very well, but last night over dinner, another technology company told me that the idea doesn’t belong to Chalco. According to my friend, the technology was invented and originally tested at a university in China’s North East. (That’s a clue for those of you who know China’s aluminium technology market.)
No way of knowing who is right. In China’ patents are based on “first to file”, not “first to invent”. But I hope it is the technology company, not Chalco, that came up with the concept. That way, it can be shared with others, for a total industry gain, rather than locked into Chalco smelters for a single competitive advantage.
Bookmark this page as a ready reference for the future….
China’s National Bureau of Statistics has released the major figures for 2010. Here is a snapshot.
GDP 2010: 10.3%, while for Q4 it was 9.8%
CPI 2010: 3.3%, with 4.6% in December. Food inflation in December 7.2%, non-food 1.4%
Exports 2010: Up by 31.3%, imports up by 38.7. Net trade balance 6.4% down.
Total investment in fixed assets: grew by 23.8%
Industrial Production 2010: up by 15.7%, but only by 13.3% in Q4
Domestic consumption 2010: up by 18%
Money supply (M2): up by 19.7%
Electricity consumption 2010: up by 13.3%
Reports are emerging that a major explosion has occurred at Petrochina’s Fushun oil refinery. Fushun is in far northern China.
The reports are indicating that the explosion occurred in the residue FCC at number 2 refinery, at about 9.30am this morning local time.
The number 2 refinery can process up to 8 million tonnes of crude oil per year. Its coker processes up to 2.4 million tonnes.
I will add more information as it becomes available.
Update: reports say that 30 people were injured in the explosion. Apparently the main part of the refinery is still operating. Plant management does not want to stop the process, because it would be impossible to restart until ambient temperatures rise sufficiently. (It is currently -7c here in Beijing, so how much colder must it be way up north?!)
There are separate reports of an explosion at Jilin refinery, which is also in North China, not so far from Fushun. However, it is not clear whether these reports are confusing refineries, or whether there was a separate unrelated incident. More to come.
Back in November, we brought you this post, asking you to guess which major aluminium company was looking to build smelters in China.
Now, finally, almost 3 months later, Alcoa finally announces that they are talking to China Power Investment Corporation.
According to our sources, the discussions were with Shenhua Coal, one of China’s largest coal companies. Perhaps our source was wrong - CPI is definitely a major energy company, with aggressive plans for their aluminium business.
There are some things that worry your humble blogger about this announcement. First, there is no mention in the announcement of Alcoa’s involvement in Henan and Qinghai provinces, despite our sources naming these two provinces as being the centres of Alcoa’s interests.
Second, why Alcoa? CPI already has the smelting technology, and is already well experienced at building new smelters. It is currently building a new smelter in Inner Mongolia, with 350kt capacity. It already owns Qingtongxia smelter, until recently the biggest smelter in China. Heck, that smelter was part-owned by Alcan until 2007, so there may still be some Pechiney technology lying around inside the smelter.
CPI is an energy company first, and its aluminium business is still relatively small compared to say its nuclear power business. It doesn’t need the capital, that’s for sure.
Alcoa has a history of some involvement with Chalco in China, and CPI are competitors to Chalco, so another question mark as to why CPI chose Alcoa.
I have read some press saying that perhaps CPI wants access to clean energy technology. But it already has that too, thanks to its huge investments in wind and solar energy.
I suspect the real reason is because CPI was chosen to be the vehicle with which to do business with a foreign company. It is not uncommon for these decisions to be made at a political or bureaucratic level, then passed down to the board.
If CPI made the decision themselves, without guidance from Beijing, then probably they were left with little choice. Rio Tinto Alcan is already heavily tied up with Chalco. UC Rusal would make an interesting partner, since they are just across the border in Russia, but Rusal is pursuing its own plans for supplying China’s future aluminium demand. BHP Billiton is not big enough in aluminium to be interesting. Perhaps Hydro Norway, but Hydro may have been considered too much of a competitor, given that Hydro is also an energy company.
My third concern is, why CPI, from Alcoa’s point of view? Surely Alcoa knows of the problems and pitfalls of Alcan’s experience with them in Qingtongxia, although to be fair, at that time the smelter JV partner was the provincial government, not the energy company. But why did Alcoa not choose someone like Xinfa, or Xinren, two of the more enterprising aluminium corporations in China.
After all, CPI is an SOE - a State Owned Enterprise. SOEs are growing in importance and power, but they tend to be inefficient and although they have plenty of capital, they answer finally to politicians, not to the board.
One thing about this announcement - predictions that China will be a net importer of millions of tonnes of raw aluminium by 2015 will prove to be wrong. It will also cause Rusal to sit up and take notice. An Alcoa smelter or two inside China is going to be a tough challenger to their plans to position themselves as a major supplier to China.
No doubt Chalco is also closely reviewing their strategy as a result of this announcement.
The pet coke classification table which many of us are familiar with has recently been revised.
The original table was published many years ago by Sinopec. At that time, high sulphur coke production was unheard of in China, so the classification table carried only 6 grades of coke, namely:
1A Max 0.5% sulphur, VM 12%, ash 0.3%
1B Max 0.8% sulphur, VM 14%, ash 0.5%
2A Max 1.0% sulphur, VM 14%, ash 0.5%
2B Max 1.5% sulphur, VM 17%, ash 0.5%
3A Max 2.0% sulphur, VM 18%, ash 0.8%
3B Max 3.0% sulphur, VM 20%, ash 1.2%
Sinopec has now announced new grades of coke, being 4A, 4B, 5# and 6#. The most important of these will be the first. It represents cokes with sulphur between 3% and 5%. 4B is for cokes with S = 5% - 7%, while grades 5 and 6 are for 7%-9% and above 9% respectively.
This announcement is long overdue. The really nice part would be if China’s Customs department could adopt something remotely close to the same classification system.
Rio Tinto Alcan announced yesterday that the Queensland floods had made it impossible to supply some aluminium customers with their orders. Although the smelter itself is not affected, cuts to the major highways and the closure of the Brisbane port facilities had stopped delivery of metal to both domestic and overseas customers.
RTA has however said that alumina supplies will not be affected.
Alcoa has announced the restart of three US based smelters, in a sign that global demand is now strong enough to sustain the additional metal.
Alcoa has announced that potlines at Massena, Wenatchee and Intalco will be restarted, bringing 137,000t into the market in 2011, and 200,000t annually. Alcoa’s announcement made much of the electricity prices enjoyed at these operations, citing that all three are under the worldwide average.
Alcoa will still have 674,000t of idle capacity following these restarts. That makes this move a cautionary one - presumably a strong scenario would have brought about more capacity restarts.
That also takes up to 100,000t of anode grade coke (perhaps 80,000t of CPC) out of the market for overseas buyers of that material. Should Alcoa decide to unwrap more USA capacity, that could test the export market for CPC. Although the total equation is probably still in balance, the geographic and time-wise imbalances could push prices, especially if refining economics don’t improve.
The floods devastating Queensland and New South Wales in Australia make for dramatic television on the nightly news, but the effects will stay in the market for months after.
Queensland produces about 120 million tonnes of coking coal per year and about half that much of thermal coal. With several companies already declaring force majeure, and others still reeling with flooded mines and destroyed transport lines, already some producers in the USA and elsewhere are fielding enquiries from worried buyers.
The spot price of coking coal ht US$270 this week, but is sure to go higher. Thermal coal prices are also rising, heading over $130/tonne. There is no doubt that the extensive damage caused by the floods will cause the coal market to heat up strongly in the coming weeks.
This will present a challenge for China’s coal market. Currently the price of thermal coal is fixed by the government, but with prices rising in Australia, Chinese producers will be looking for a piece of the action.
Although China is technically self-sufficient in both forms of coal, simple arithmetic of supply versus demand doesn’t account for the true picture of the market. With bottlenecks both in production and in transport to the power stations and steel mills, China relies on imports as a back-up. Imported coal comes via different supply routes, and that takes some strain off the existing infrastructure.
Rising prices for coal and eventually for steel and electricity will not help the Chinese government in their fight to control inflation.
Australia might be counting the cost of the floods now, but China will soon be feeling the effects too.
I am sure everyone is sympathetic for the plight of those caught in the floods, and we at AZ China add our best wishes.
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