Monthly Archives: January 2012
The Chinese New Year holiday is now behind us, and AZ China is back in full swing (well, almost - one staffer has an extra week off for her honeymoon).
But the same can’t be said for China in general. After the tiny reduction in Reserve Ratio Requirements, many commentators were predicting further moves to ease the tight market conditions. But those calls have not been met with action - so far.
Even the usual fireworks displays around Beijing were more muted than normal. Whether people didn’t spend as much on crackers as previous years, or inflation pushed the prices up out of reach of the average family is hard to say, but it was noticeably quieter this year. (Hopefully that meant fewer people blowing fingers off and eyes out - the usual consequence of the laissez-faire attitude to fireworks here).
So the year of the dragon has started with a whimper. No signs of an economic turnaround, no signs of the gung-ho approach to business that have pervaded in previous years.
The next milestone to watch for will be “liang hui” - the period in March when China’s parliament and consultative committee hold their annual meetings. Of course, these meetings are not much more than an opportunity for ambitious individuals to “strut their stuff”, but it is often a time when the Communist Party announces new initiatives.
We can only wait and see.
The Super Early Bird Registration discount ends January 31, 2012. If you have yet to register for AZ China’s May conference in Qingdao, now is the best time to do so!
China’s Shenhua group, one of China’s largest energy companies, has commenced construction of a new 1 million tonne alumina refinery. Nothing new about that - China is now a dab hand in alumina. But this plant, being built in Erdos in Inner Mongolia, will produce alumina from fly ash.
Fly ash is a residue from burning coal, and can contain up to 50% alumina.
What’s more, the long-term plan is to expand the refinery to eventually 6 million tonnes. It will be joined by a 3 million tonne aluminium smelter, as well as all the necessary infrastructure. The plant will include a carbon plant and a power station.
Shenhua is one of the world’s largest coal companies, featuring in the top 500, and according to their PR people also the most modern in China.
It’s an interesting investment, considering the jury is still out on whether alumina from fly ash is a good idea. Datang, the company that pioneered this technology with 2 plants each of 300,000t (also in Inner Mongolia), has reportedly been having problems maintaining stable properties in the alumina. But they must be optimistic about bedding the technology. They too have announced that they plan to expand their alumina capacity, taking themselves up to 1 million tonnes.
Meanwhile, the price of alumina has been holding stable in the China market, but that’s due to some plants cutting output.
China is now rapidly winding down. But I am not talking about macro economics, rather I am referring to the fact that Chinese New Year is almost upon us.
New Year’s eve will be this coming Sunday, when the 2 weeks of fireworks begins. But the vast majority of Chinese people start making the journey back to their families well ahead of the official break. Why? Just think about the fact that some 600 million people are in transit. This mass movement of people is bigger than the Hajj. China’s domestic rail system is quite modern, but it simply takes several days to move so many people.
The same is true at the other end of the week’s holiday.
Here at AZ China, we are technically still open, but most of our staff have now left for their home towns. But since most of our clients are open through this period, we are also providing some coverage through the week. You can write to me at Paul.adkins@az-china.com if you have anything that needs answering next week.
In typical Chinese fashion, there is no recognition of weekends in these times. Because the prescribed holiday period is for 7 days from Sunday, the first day back to work is Sunday January 29. So if you have any questions that day, we will all be on deck ready to respond!
By the way, the heading on this post says “Happy New Year of the Dragon”.
Reports from Europe indicate that the failed aluminium smelter in the Netherlands, commonly referred to as Zalco, had some calcined coke on the way to the plant at the time that the power switch was turned off.
Apparently the coke was shipped as far back as last October, but was in a hold in a Panamax that was making several stops. Zalco went bankrupt mid December. The plant included an anode plant which also made anodes for its sister smelter, which I understand is now also closed.
One presumes title to the coke is clearly laid out in the contract, passing to the buyer either at FOB point or at CIF time. One hopes for the sake of the seller that the CPC was sold under letter of credit, otherwise the bankruptcy receivers will treat the debt like any other.
It’s a relatively small parcel destined for a relatively small smelter, and normally I wouldn’t bother mentioning it. But with Alcoa announcing 240,000t of capacity closures, RTA partially closing some capacity (mostly unplanned), and Hydro Norway closing potline 1 at Kurri Kurri, raw materials managers around the world are no doubt reviewing their contract positions and inventory levels. I understand one smelter group has already started calling in suppliers, similar to what happened in 2009.
It is not a good time to be long in raw material inventory, but equally, it’s not a great time to be selling these materials to the world’s smelters, who no doubt are asking for reduced prices at the same time as they reduce volumes.
Metal Bulletin asked me to jot a few words on my reaction to the recent predictions that Alcoa made as part of their quarterly results announcement.
Perhaps the only other comment I would make, is that it is a mistake to think of China’s aluminium market as being part of a global market. For all intents and purposes, what gets made in China is for Chinese consumption, and the fact that prices in London are higher or lower is almost an accident. Chinese producers like to maximise the China price, keeping the price just below the point where the arbitrage window opens too much. In that respect, the more that Alcoa and RTA and Norsk Hydro and others close capacity, the less likely it is that they will be able to sell metal into China, since the higher London price will keep the arbitrage window closed.
MB published my article Friday. Reprinted here with permission from MB.
Klaus Kleinfeld, Alcoa’s president, won a lot of airplay this week talking about supposed aluminium production cuts on the way in China.
Around 5.7 million tpy of output is operating at a loss and some 1.1 million tpy of capacity could be taken out of the Chinese market this year, he told a conference call after Alcoa released miserable results and announced closures of its own.
This forecast sits snugly in the mainstream consensus on China’s aluminium market, or at least in the consensus coming from the research and PR departments of the world’s aluminium majors.
Rising energy costs and tighter environmental regulation will restrain domestic capacity, they say, opening the gates for imports and propping up world prices.
But it may pay to look at the facts more closely before making – or indeed accepting – predictions like Kleinfeld’s.
Cuts? What cuts?
Plenty of consultants and analysts will tell you the average cost of production in China hovers at around 16,000 yuan per tonne. While this is true, this sort of figure fails as all “averages” do. The average tells you almost nothing.
The highest cost smelter in China is operating at a production cost of around 18,000 yuan per tonne. At that rate, you would expect it to close fairly soon, especially if the outlook for prices is flat or bearish.
But that smelter represents only 100,000 tpy of capacity. Put together all the smelters at a rate above 16,500 yuan per tonne, and there is only 1 million tpy, out of a total 23 million tpy.
At the other end of the scale, there are smelters operating at 12,000 yuan per tonne and below, and – crucially – the new capacity coming into the market in 2012 is all expected to be in this quartile.
In this range from 12,000 yuan to 18,000 yuan (a span of around $1,000) there are about 100 smelters in operation. More than 80 of them are running at 16,500 yuan per tonne or below.
The aluminium price on the Shanghai Futures Exchange has been hovering around 16,000 yuan per tonne for some weeks now, and we have indeed seen some small capacity cuts.
Unless the metal price changes significantly for the worse, it’s hard to imagine why those 80 smelters would be part of the cuts that Kleinfeld predicts.
That does still leave 1 million tpy of capacity, from ten smelters in the highest quartile, at risk of losing too much money to stay afloat. The biggest of those is only 170,000t and the highest amperage only 230kA.
But taking those ten smelters out is only half the story.
There are a large group of new smelters set to join the market through this year. This group will add more than triple the capacity that is presently at the highest risk, to 3 million tonnes: even if Kleinfeld is right, the “net reduction” will actually be an increase of perhaps 2 million tonnes.
The elephant in the room
All this supposes that the metal price remains at around 16,000-16,500 yuan per tonne. Certainly it can’t go higher without a sea change in demand.
There is a lot of speculation that the Chinese government may launch a limited stimulus package focusing on infrastructure development, and speculators and traders are buying up big in the last week or two, betting on the price rising soon. But speculation is just that.
Perhaps the metal price will fall through the support levels of 16,000 yuan per tonne. We know that some smelters, especially in Henan province where the electricity price is very high, are ready to cut output if the price flops to 15,000 yuan per tonne.
But before it gets there, we are likely to see metal moved out of Shanghai market, creating the appearance of supply shortages and boosting the price as a result.
Some people have been pointing to rising Shanghai inventory levels, using it as evidence that China is producing too much metal. The opposite is true. Metal moves into Shanghai because those in long positions are looking to capture profits. Metal moved out of Shanghai last year because the price outside Shanghai was better.
Many analysts operating outside China seem to think that the Shanghai market is the only aluminium market here in China. Far from it. Many traders stay away from Shanghai, fearful of the “elephant in the room” – Chalco.
And it is Chalco that we most need to watch in 2012. They have more than 1 million tonnes of capacity operating at 16,000 or above. They are the worst-placed of all the big corporates in China primary aluminium. CPIC for instance, has all of its capacity operating at 16,000 yuan or below.
But Chalco is the darling of the State Council, and is more than likely than most to follow Party orders about keeping jobs intact rather than worrying about temporary financial losses. Chalco owes the State Council they made a fortune out of the last strategic bail-out in 2009, and the State Council will be aware of that.
One could speculate that this was the real objective of Mr Kleinfeld’s remarks: to taunt a company that is both a shareholder in rival Rio Tinto Alcan, and a competitor in its own right.
But more likely he was looking to talk up his own book, boost metal prices and improve the share value. Certainly, the facts don’t support his claim.
Word coming through from Australia is that Hydro Aluminium in Norway has cut production in line 1 of the smelter at Kurri Kurri.
According to the local press, it will mean the loss of 60,000t and 150 jobs. However, my sources tell me that the cut will be 30,000t. The reporter may have assumed that because the cut is to one of the three lines, which total 180,000t, that the cut would be one third of capacity. But line 1 at Kurri Kurri is the oldest and smallest.
But I also understand that the order has been given to not reline any more pots in lines 2 and 3. Unless the market turns around strongly, that will mean the end of Kurri Kurri.
Kurri Kurri smelter is nestled in a beautiful part of the world, with the Hunter Valley wine district alongside, and the beaches just an hour away. But it will be difficult for those workers to find other employment. Nearby Tomago smelter has also announced the loss of 100 jobs, although no loss of production.
The problems for Kurri Kurri have been mounting for some time. Apart from the old age of the plant, there have been numerous changes of ownership (when I first visited there, it was an Alcan smelter), and more recently a lot of problems negotiating a long term powr agreement. The introduction of a carbon tax in Australia later this year was probably more than the smelter cost structure could bare.
The ultimate problem of course is that it is just too old and too small nowadays. With mega smelters exceeding 1 million tonnes, and the norm being for smelters well over 500,000t, a little smelter like Kurri Kurri isn’t going to cut the mustard.
This announcement has probably put the shivers up the spines of the staff at Bell Bay and Point Henry smelters in Australia, both of whom are similar vintage to Kurri Kurri, though owned by Pacific Aluminium and Alcoa respectively.
According to our research, China produced just on 24 million tonnes of petcoke in 2011, easily a record. This was a growth rate of 20% based on 2010’s output. That comes on top of imports of around 3 million tonnes, mostly from the USA.
But the most surprising aspect of this volume is that 2.5 million tonnes of this extra coke was anode grade or better. (Not all of it went into anodes - some will go into electrodes).
The reason for all this extra coke, especially in an economy that has been slowing in the last 6 months, is that China’s oil refineries have been producing record amounts of diesel. Because of the configuration of the refineries and the crude oils they have been using, that has meant that they also produced petcoke as a by-product.
Of course, just because there is lots of anode grade coke available, that doesn’t stop calcined coke producers from selecting lower grades of coke for their base blend. Their issue is not with supply, but with price. Nevertheless, from a quality management point of view, China still presents the world’s smelters with an alternative to the path of pushing down into cokes that they would rather not use. For almost 10 years now, there have been calls for aluminium smelters to embrace NTACs (Non Traditional Anode Cokes.) But from a Chinese perspective, those calls appear to be misguided.
With this volume of coke in the market, less about 3 million tonnes of exports (green coke, calcined coke and in anodes), it is surprising that the price did not collapse. Certainly it has been easing over the last several months, but with coal prices underpinning fuel grade coke prices, the risk of a collapse has been mitigated.
So, what will happen in 2012? We do not see any change in market dynamics in the short term. The aluminium industry is in a “steady as she goes” mode, and oil refineries are continuing to produce diesel. We think the bottom of the price cycle is almost upon us.
Longer term? You will have to read our next Black China Report, which is due out in a few days time. If you aren’t a subscriber, contact us here at AZ China.
Alcoa yesterday announced that its smelters in Spain and Italy will provide the missing 240,000t of capacity from its announcement last week.
Alcoa had announced that 531,000t of capacity would close, but that included 291,000t of pots that were already stopped.
It is bad news for the staff at the plants in those two countries, but employees around the world in other operations would have sighed with relief. Alcoa’s portfolio includes several plants with high operating costs, and the cuts could easily have hit in the USA or Australia as much as in Europe.
But if I were one of those employees, I wouldn’t relax for too long. Taking a net 240,000t out of the supply side is not enough to improve the total market balance. Even with Rio’s operating problems in two plants and union problems in a third, the net reduction has not been enough to pull the LME price out of the doldrums. As Jo Mason (formerly Metal Bulletin, now with Reuters) reported a few days ago, much more severe cuts are needed.
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