Monthly Archives: December 2011
Henan Zhongfu Aluminium, which owns two plants in Henan province, has announced the closure of 30,000t of annual capacity. The high power price in that region was been blamed as the culprit. The closure will be at their Linfeng plant. Their Gongyi plant will not be affected.
30,000t represents less than 10% of Zhongfu’s capacity, and a tiny fraction of the capacity in Henan province, much less of the country as a whole, but it adds to the numerous small closures that have occurred in recent weeks. These closures are piling up as the the combined effects of high power prices, weak demand and soft metal prices put pressure on the industry to take capacity out of the stream. Now that the LME/SHFE price arbitrage has opened (see previous post), that only adds to the pressure.
So far, it has been a case of old, inefficient pots biting the dust, and in that regard, it was always a matter of time. But sooner or later, we are likely to see a more significant shutdown announced. Something has to give.
The fall in aluminium prices in London on Wednesday has traders scrambling. The gap between the LME price and that of the SHFE has now opened sufficiently to allow traders and entrepreneurs to import into China, even with freight costs, port and handling charges and sales tax included.
London 3-month prices dropped to a whisker above US$2000 per tonne on Wednesday, while SHFE is running at around RMB16,500. With the threat of imminent closure of capacity, the SHFE price will find some headwinds for it to fall any.
Some reports suggest that the arbitrage window will remain open for as much as 3 months. That’s a difficult call. Certainly SHFE prices are likely to find support around the RMB16000-RMB16500 mark, so it’s then a question of what happens in London.
However, an arbitrage situation is not good for the local market. Traders, producers and anyone long in raw aluminium are all likely to want the window closed. Bringing more metal into China only makes this market weaker.
Some producers had been managing the market by running inventory and production levels just high enough so that they could maximise the price without inviting importers into the picture. But that strategy only works when the part that you can’t control - London - behaves steadily. If London falls, their ability to manipulate the market is greatly reduced.
Shanxi Guanlv (a publicly listed company) closed all 216 of their 85ka cells on December 11.
The closed capacity is only 51kt, so the affected production in 2011 is about 4000t.
The remaining capacity is 180kt. They were due to close anyway, as they had been named on the official list of “backward capacity”. But on December 1, the power price for this company increased by about 10% to almost 0.5 yuan. Their cost of production has increased by almost 500 RMB per ton of aluminium.
By the way, the Chinese word for aluminium is Lv. The v is more accurately written as a u with two dots above it, but my keyboard doesn’t allow me. The Chinese character for aluminium is 铝.
We are pleased to announce that Mr Ron Knapp, Secretary General of the International Aluminium Institute, will be our special guest at our 2012 International Aluminium Raw Materials Conference.
Mr Knapp will officially open proceedings when the conference proper gets under way May 23. The conference kicks off the previous evening with a welcome reception.
We are delighted to have Mr Knapp join us.
The conference will be held at the Shangri La Hotel, Qingdao, May 22 - 24. It is easy to get to Qingdao from Shanghai or Beijing. For more information about the conference, please contact us at AZ China.
Antaike, the publishing arm of China Nonferrous Industry Association (CNIA) held their annual aluminium conference last week, in the seaside town of Zhuhai. Zhuhai is a favorite town for Communist Party cadres for their annual vacation, since it sits right next to Macao.
Antaike has been notorious for their poor planning of conferences. They want to get more foreign company representatives, but every year they delay the announcement of the date and location of the aluminium conference until just a couple of months out. Since it is held at the end of each year, most foreign businessmen and women have long since used up their annual travel and conference budget, and are often trying to complete their targets for the end of the year. Having to change plans at make a trip to China is not always possible. Hence at last week’s conference, where more than 500 delegates registered, only 85 foreign representatives made it along.
But it seems that Antaike have maybe finally learned a lesson. They have already announced that the 2012 conference will be held in Chongqing the last week of November. Finally we can all plan well ahead. Presumably they will get a higher ratio of “lao wai” (Chinese for foreigner) at their next conference.
That still leaves plenty of room for other improvements. Last week, the check-in process was abysmal. It took us 1 hour to get from the front door of the hotel to our rooms. Some of the papers were atrocious, or simply not relevant, or presented wrong data. And their time keeping left a lot to be desired. Hopefully one day Antaike will fix these problems and make the event more worth attending.
Who knows, maybe one day they will even move to improve the quality of the data they publish. Since they are an arm of the Government, they have no choice but to present the official numbers. In the case of aluminium production for instance, they numbers were out by over 1 million tonnes last year, and this year will be about the same. Is it any wonder some analysts sitting outside China get their forecasts completely wrong.
The world’s business press has been running stories about the announcement Thursday that Rio Tinto will go ahead and complete the expansion of its Kitimat smelter.
Kitimat, on Canada’s west coast, was previously a Soderberg plant, but is being completely overhauled, with AP40 technology and extra lines, to take it to 420,000 tonnes when the project is finished.
Some articles in the business press referred to hints that perhaps this will not be the last of the announcements for Kitimat. That would fit in with RTA’s stated strategy of moving down the cost curve by closing high cost smelters but expanding their better performing plants.
But what worries me about the Kitimat announcement is that Rio appears to be punting on China eventually becoming a net importer of the light metal.
Certainly there is a school of thought out there, that the combined effects of high electricity costs, shortages of bauxite and alumina and government policies, will force the Chinese market into a net shortage position. Esteemed companies such as Harbor Aluminum made this very forecast as recently as this week, at the Antaike Zhuhai conference.
But the problem with this bet, apart from the fact that some people are using wrong data to base their predictions, is that it fails to understand the Chinese market, and the Chinese psychology.
China has more than 20 new smelting projects under way right now. That’s in an environment where credit is tight, markets are uncertain and metal price is falling. As recently as 5 years ago, the industry was growing at more than 20% per year, and it is entirely possible that the industry can do the same thing again. That is why the NDRC has been issuing guidelines and directives, not to hobble the industry, but to avoid another over-capacity run again.
Now the Chinese government is showing the first signs of returning to an investment-lad economy, with the PBOC reducing the RRR, so what odds projects that maybe were short of funds may now be dusted off. Remember that most of the new capacity is going into the far northwest, where the local governments are actively promoting new investment.
The Rio punt, if China is what they are punting on, also relies on demand growth maintaining its present rate of knots, especially in comparison to supply. Our analysis shows that, although growth will be solid, it will not match the rates of the last few years.
In any case, plans to punt on China needing to import metal are nothing new. RUSAL has been talking about being a supplier to China for the last 2 years.
If it was my money, I would not be punting on China being anything more than a minor importer. In consumption terms, our forecasts show that any shortage is likely to be no more than 1 - 2 weeks supply, at most. And that’s about the same amount of metal that sits outside the visible inventories.
Contact AZ China if you want more information on China’s Aluminium outlook.
Spare a thought for the over-worked folks inside China’s aluminium expansions.
By our count, there are about 20 projects on the go at the moment, in various parts of China, and in varying stages of completion. Most of that extra smelter capacity is making use of technology from SAMI or GAMI.
For those who don’t know these two companies, SAMI is the Aluminium and Magnesium Metallurgical Institute based in Shenyang, northern China, while GAMI is the same name but based in Guiyang, in southern China. Both companies are owned by Chalieco (Chinalco’s Engineering company).
The only other participant in the aluminium technology space here in China is NEUI, or North Eastern University Institute. NEUI is also based in Shenyang, and has a sprinkling of ex-SAMI people in its ranks. NEUI is in turn owned by NFC, a well-known Engineering company, the one that built the smelters in Kazakhstan, Iran and other places.
Virtually all of the new capacity being added to China’s aluminium supply is coming from companies that already have capacity. Mostly they are adding capacity in order to move down the cash cost curve, putting capacity into places where the price of electricity is much lower. That means Xinjiang, Gansu, Qinghai, Inner Mongolia and Ningxia for example.
But since these companies all have experience with, and their technical people are familiar with, one or other of the three technology companies, they all tend to choose the same technology as they already have - except that the amperage is much higher.
That means the teams in Shenyang and Guiyang are working a lot of overtime. We have heard stories that these people are working on at least 3 projects at any one time of the day - or night. One person told us it’s almost like a sweatshop in Shenyang at the moment.
But it must be even worse for the teams at Chalieco. Typically in China, the technology contract is tied with the engineering contract - hence the tight relationships between the technology companies and the engineering companies. By our count, SAMI has about 8 projects currently under way, and GAMI another 4, this puts an incredible load onto Chalieco.
One wonders if this will become a bottleneck for the industry - if Chalieco can’t get enough engineering drawings and purchase orders placed in time, and fabricators’ contracts written, will it cause new smelters to be held up? Or will the Chalieco people find themselves working 25 hour days….
The Beijing government yesterday announced that wholesale electricity prices would rise, effective immediately. The price will rise by RMB0.03 per kwh. If Chinese smelters are consuming 14,000 kwh per tonne of aluminium, then the increase will add another US$65 per tonne to their cost of producing the light metal.
Of course, it won’t affect all smelters, only those who buy from the grid. Smelters who have their own captive power plants, such as the new plant recently started up by Shandong Weiqiao, will be clear of this increase. However, those smelters are still likely to see an increase in cost, as coal prices are also set to rise by up to 5% in 2012.
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