Monthly Archives: April 2011
China’s Ministry of Land & Resources has announced a new “resource exploitation” quota for fluorspar mining for 2011. The new limit will be 10.5 million tonnes, a drop of 500,000t over last year.
At the same time, the National Development and Reform Commission (NDRC) has announced that all remaining “wet” production capacity must close by the end of next month.
We don’t expect the latter announcement to have any impact on the market. We believe the market will be influenced more by simple market forces of profitability and price elasticity. Some producers, both inside and outside China, are already converting their production facilities to HF, as they can make more money from the sale of HF than they can from ALF3.
The limitation on fluorspar mining may be tested by some miners, though we think it is more likely that the threat of heavy fines will deter too many over-runs. Some fluorspar is still being traded on the black market, including some sales to India. But overall, we expect the cost of ALF3 to go up as the price of fluorspar rises in response to an increased mismatch between supply and demand.
Primary aluminium industry long-timers will cringe, but the inert anode is once again reported to be lurking in the shadows of the future. To my knowledge, at least 4 companies are working on an inert anode.
Chalco has been quietly working on some design principles for at least 2 years that I know of, though probably much longer. Rio Tinto Alcan has a huge carbon R&D team, part of which is also focused on the technology. And of course, Alcoa has been working to develop some cells, ever since their disastrous flurry in 2003
UC RUSAL is the fourth, and their program features in an article in Steelguru this week. While a magazine with a name like that can hardly be called the fount of knowledge on aluminium R&D, nevertheless, it makes for interesting reading.
According to the article, 5 Siberian smelters together account for 6% of all of Russia’s electricity demand, which puts them in a vulnerable position.
The article goes on to say that RUSAL claims it will have the inert anode operating by 2015. It quotes Rusal’s president Oleg Deripaska as saying that their inert anode will generate oxygen. In fact, so much oxygen that one pot will produce the equivalent of 70 hectares of forest. That’s a bold claim 5 years out.
But there are those who talk and those who do. I understand that Alcoa now has more than one cell already operating, with the metal coming out of the pots already at very high grades. That was one of the major problems with the early work - the anodes did not last as long as a carbon anode, and the metal was poor quality.
Time will tell. Perhaps a breakthrough will come. Perhaps some progress has already been quietly made. But even if an inert anode can be brought up to the standards set by carbon anodes, the trick will be to make them capable of retro-fitting to the 40 million tonnes of existing smelting capacity.
This coming summer could deliver a shock to those who are short on China aluminium.
Already the Chinese press is warning of electricity shortages in central and eastern provinces. Zhejiang province, south of Shanghai, is already “importing” around 10 million kilowatt hours per day to satisfy growing demand, and shortages of coal. Other provinces are following a similar path, and matching these purchases with brown-outs and rotating shutdowns to factories and industrial users.
If this problem extends to some of the aluminium-intensive provinces, such as Henan and Shandong, it could lead to the authorities ordering smelters to reduce their offtake. That in turn will cause the metal price to rise, as shortages of inventory start to become real. Those players who have taken a short position on metal, may be the ones to get the electrical shock.
However, we aren’t so sure that it will lead to a wholesale problem. Take Henan province for instance. It would not be the first time that Henan has had problems satisfying electricity demand. If the local authorities were to issue an energy-restriction order, however, it may not lead to much. The biggest smelters in Henan are all owned by power companies. Only Chalco, which does not have a big footprint in that province, might feel the effect. (Be ready to see Chalco share prices slip as a result.)
Meantime, the NDRC is already deploying some mitigating tactics. We understand that the fixed price on coal is about to be lifted. That will give the coal companies more incentive to sell coal to the power stations. The power companies are already enjoying a lift in the wholesale price of electricity, so they can afford the higher price for coal.
No doubt we residential consumers will once again be issued with orders to reduce the use of air conditioners. It’s no fun in summer when the air-con is set to 26 - 28C.
At the risk of nailing the argument when it is already dead, there is one more news item in today’s Chinese press that illustrates why last week’s announcement from the NDRC is without teeth.
In a discussion in today’s China Business News, an insider from the China Nonferrous Industry Association admitted that only about 6 million tonnes of present-day capacity has Central Government approval to exist. That means that the remaining 16 million tonnes does not.
According to the insider (who was not named in the article), provincial and local governments like to achieve high GDP growth, so embark on their own capital expansion programs. A second related reason why some smelters exist today is because the local governments like to build integrated facilities, in order to maximise the GDP growth potential, according to the CNIA official. So for instance, if they have bauxite reserves in their region, they promote local entrepreneurs into not just building an alumina refinery, but to add a smelter to the portfolio, and downstream facilities as well.
Interestingly, the article hinted that local and provincial governments actively support private companies who defy Beijing. While we know these bureaucrats often quietly thumb their noses at the Central authorities, few would openly admit to it. Probably such a claim will be met with loud protests from the provinces, but it would not be impossible to believe.
The price of aluminium inside China includes VAT of 17%, so there should be a premium in the price inside China compared to the price on the London Metals Exchange (LME). For the last several weeks, however, spot prices for primary aluminium in Shanghai have been lagging the LME, and the gap is getting wider. Using the current USD/RMB exchange rate, the gap is now over US$220 per tonne.
Part of the reason is of course due to the gradually appreciating RMB, and the relative weakness in the USD. All commodities are showing slightly higher prices because of this balancing effect. For aluminium, the price difference is also down to strong growth in demand in many western economies, as well as some replacement for copper, where prices are nudging close to $10,000 per tonne.
In China, new smelters entering the market are having an impact on the ability of the price to grow as strongly as the LME. However, as with all markets, timing may prove to be the important factor.
The macro economic signals are still very good for aluminium consumption inside China. With GDP continuing to travel at just under 10%, and with announced plans to build 10 million new apartments (not all in the same tower), as well as continued strength in the automotive industry (which grew by 5% in March, on a y-o-y basis, despite new restrictions), China’s demand for the light metal is set to improve by as much as 10% - 15%.
As well, higher energy prices, increased carbon costs, and inflationary pressure on wages, are all combining to put a floor under the cost of making the metal. It is likely therefore that the metal price is set to remain precariously balanced between the downward push of new smelters and the upward force of costs. Price movements are likely to be sideways and jerky in the coming months.
One thing is for sure - while LME metal sits so far above SHFE, nobody will be rushing to import the metal. Any imports of primary metal will be offset by exports of the same metal in the form of grain refiner, master alloys and alloy wheels.
Another outcome from the announcement last week about Beijing’s call for restrictions on new aluminium smelters is the rush to IPO for some.
We understand that Hong Qiao, owners of the Shandong Weiqiao smelter, are rushing to revive their listing application. Readers may recall that Hong Qiao started the listing process back in January, but cancelled the IPO after just two days of investor marketing.
We can’t comment on the strengths or otherwise of this particular share offering, but if you are looking for wealth opportunities in Chinese aluminium, don’t bank on last week’s NDRC/MIIT announcement as a catalyst for new investment, despite what some prospectuses (prospecti?) might say.
Some interesting outcomes from the announcement on Wednesday about curbing China’s aluminium sector.
* On one hand, Macquarie Bank advised their clients that they believe the effect of the announcement would be minimal. To quote them, they think that “Beijing will loosen the campaign over time, as they have done several times in the past.” They cite most of the same reasons as we did. Glad to know that MacBank agrees with us.
On the other hand, C1 Energy came out with an announcement that there will be an oversupply of green petroleum coke as a result of the Beijing announcement. Being a Chinese company, I guess they have accepted the announcement on face value. I don’t wish to criticise them, as they do a good job at other times, but I suspect it is a little dangerous to portray the green coke outlook as being “long”. Our view is that green coke is going to be anything but over-supplied.
As an aside, there is plenty of fuel grade green coke in the market right now. We have received several reports that Nanjing is awash with imported coke. Fuel coke prices are indeed falling as a result of the huge quantities that have been imported his month. But the same can’t be said for anode grade coke, and although a soft fuel grade price will dampen the anode coke price, we are still concerned about the long term outlook.
10 days ago, we posted a story about an imminent announcement regarding new restrictions on smelter construction. See here for that post.
The announcement came out yesterday. China’s Ministry of Industry and Information Technology (MIIT), together with other ministries including the NDRC, has published a notice on their website calling for curtailments across the board.
Our reaction to this announcement is unchanged from last week. We have no plans to slash wrists or declare an end to the world as we know it. Certainly we do not see any sudden change to our long-term views about import levels.
The announcement does not affect new smelters or expansions, if they have already moved from the drawing board to an engineering stage or later. Second, it is aimed at ensuring the new plants are a certain size and efficiency.
One needs to read the fine print. The relevant ministries are seeking to bring more balance to the industry. In the announcement, they quote capacity utilisation percentages as low as 70%, and low profit margins for the existing participants. It’s this that they are seeking to redress.
To gain a better understanding, let’s look at some of the bigger projects that are out there in the future. East Hope’s new smelter will not be affected, despite the fact that it’s long term design calls for total capacity of 3 million tonnes. Shenhuo’s new smelter in Xinjiang will not affected, and it will be 1.6 million tonnes.
By our analysis, some 19 projects will not be affected. Those projects have a total capacity of around 8 million tonnes.
Unfortunately for us, our more phlegmatic view isn’t the stuff of headlines. No doubt the more radical the reaction to this announcement, the more that the press will lap it up. But we would rather be accurate that sensational.
Last week, the NDRC announced a new round of price rises for on-grid electricity. The rises vary province to province, with the biggest rise occurring in Shanxi province (0.026RMB/MwH) and an average across the country of 0.012RMB/MwH.
This rise affects only the price received by the power stations supplying power onto the national grid, and comes in light of higher coal prices. Transmission, distribution and retail prices remain unchanged, though it would be foolish to rule them out. The higher price will be absorbed by the grid companies, who no doubt will start lobbying to be allowed to pass it on.
For the primary aluminium industry, these rises will affect only those companies who buy from the grid, though most have long-term contracts or direct purchase contracts in place. With metal prices sitting above the break-even line for some time now, at least the smelters can bear the cost increase, even if they seek to pass it on to the market.
The announcement does not name all the provinces affected, but among those that are named, there is no mention of the “gun” provinces - those that are home to the biggest capacity increases. It is unlikely that provinces such as Xinjiang, Gansu, Inner Mongolia, Qinghai or Ningxia will feel the effects of this rise.
In Xinjiang alone, there is 10 million tonnes of new capacity being built over the next several years.
Some media have been running a story about a new NDRC policy paper that’s due out soon. According to the reports, the NDRC policy will stop or reduce investment in new smelters, though those that are already in construction will not be affected. Here’s what Bloomberg had to say on the story.
We also heard about this, but chose not to rush to print. That’s because the news item was too “left-field” to be run without getting more information.
What we have now learned, which has not been reported by Bloomberg and the other agencies who ran the story, is that the policy is aimed at blocking small scale plants. The idea of the plan is that any new plant must be at least 500,000t in size (that number is a little rubbery - we are still confirming it). The NDRC wants to achieve high efficiency levels in new plants, especially energy efficiency, so their way of doing this is to order that the capital investment in the new plant must be a minimum amount.
Secondly, the plan excludes areas such as Xinjiang province, where the largest investments are already taking place.
Our reading of the draft policy is that if it sticks, it will support companies such as East Hope, Shenhuo and Chalco, who are all building new plants. The help comes by the fact that companies with shallower pockets may be prevented from entering the market.
But that’s a big IF in the first part of that paragraph. Beijing’s policies have not always stuck in the aluminium industry. A good proportion of China’s aluminium capacity (almost half) is owned by local governments, who sometimes suffer from selective hearing when it comes to pronouncements from Beijing.
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