Monthly Archives: June 2012
Word has come through that Alcoa’s Point Henry smelter will get a reprieve for 2 years.
A combined package from the Victorian and Australian governments will inject AU$40 million into the plant. According to a report in the local press, the money will be used for plant upgrades, “staff development” and energy efficiency projects.
But 60 to 65 jobs will go, and Alcoa must operate the plant at the same levels as currently, or risk repaying the government. There was no word on what would happen after the 2 years expires. Presumably there is a view that metal prices would be back up above $2200 - $2400. Point Henry would need that sort of level from the LME for it to be profitable.
Taking the plant capacity of 220,000 tonnes, and splitting the $40 million over 2 years, it represents a reduction in operating costs of about $90 per tonne. With the LME sitting around $1850 (3M), it means there is still a significant distance to get to black ink. Various estimates that we have seen put Point Henry’s operating costs at about $2400. Of course climbing premiums help cover some of that gap, but it certainly seems as if Alcoa has had to at least match the Government package.
It is certainly good news for the local community (declaration of bias - I grew up in that town and worked at Point Henry almost 14 years). Outside the public service, Alcoa is probably the largest employer in the nearby city of Geelong, which has had 2 decades of bad news - financial disasters, manufacturing industry decimated.
The government rescue package pales into insignificance however, when compared to the Henan Government’s rescue package here in China. That package has a price tag of up to US$330 million for 7 months, and protects probably 3,000 jobs, compared to about 540 in Australia, as we discussed in a recent post.
Over on Linkedin, there has been some discussion about which smelter is the largest in the world. Apparently EMAL is claiming that they will take that title when their expansion finishes next year. They will go to 1.3 million tonnes at that time.
For the record, here are the largest single site smelters in China:
1. East Hope - Inner Mongolia province, 880kt
2. Xinfa - Xinjiang province, 800kt
3. CPIC Huanghe - Qinghai province, 555kt
4. Shenhuo Yongzhou - Henan province, 520kt
5. Nanshan Yantai - Shandong province, 450kt.
Shandong Weiqiao has 4 plants all very close to each other, but not behind a single fence, so they don’t qualify for this list, even though together they add up to 1.8 million tonnes. (There’s a gap of about 28 kilometres between them.)
This list will go out of date next year, when Xinfa’s smelter in Xinjiang adds another 600kt, taking them to 1.4 million tonnes in a single site. Then in 2014, it will go out of date again when Shenhuo’s 1.8 million tonne plant is completed. But Xinfa will have the last laugh, though perhaps not until 2015 or 2016, when they finish their expansion with an additional 1 million tonnes, taking them to 2.4 million tonnes - in a single site.
It has now been revealed that only 5 companies in Henan province will receive the RMB0.08/kwh subsidy from the provincial government.
Those 5 are Chalco, Yichuan, Shenhuo, Wanji and Yulian. But together they account for about 3.6 million tonnes of capacity.
The subsidy will be available for the 7 months from June 1 to the end of the year, with a metal trigger price of RMB18000. Since the aluminium price is hardly likely to get anywhere near that trigger, it means that these 5 companies have a benefit of about RMB1,100 per tonne of metal produced.
In that scenario, it is quite possible that some or all of the idle capacity belonging to these companies could also get restarted. If that happens and all 5 companies run to 100% capacity, then the provincial government will be up for RMB0.3 billion per month. That’s about US$48 million, or a total bill for the 7 months of about US$330 million.
It’s unlikely that all idle capacity will be dusted off for a 7-month window, but the ratios of investment in the subsidy hold true.
Now here’s the rub. If we assume a workforce for the full capacity of somewhere around 6,000 direct workers, and indirect jobs (everybody from maintenance companies and consumables suppliers to the local “jiao zi” or “chuan’r” maker) at a ratio of 5 indirect jobs for every direct one, then we can work out the government’s investment per job.
And that calculation is sobering. If we assume 33,000 (direct and indirect, I picked this number to make the division easier) jobs are protected by this move, then the government is spending US$10,000 per person over the seven months. In that same period, the average income for a Chinese worker is likely to be about RMB3000 per month, about US$480, or US$3,400 for the 7 months. There’s a lot of assumptions and averages in these numbers, but any way you look at it, the Government is spending 3 times the average salary, just to protect these jobs.
Anyone doubting that the government is very nervous in the run-up to the once-in-a-decade leadership change, can now dispel those doubts.
Shanghai’s aluminium price has reacted exactly as we predicted. Following the Reuters story on Tuesday that Henan Provincial Government had agreed to a RMN0.08/KWH electricity price cut, the spot price of aluminium has dropped RMB300. (See the previous post for more on this.)
The light metal is now down to RMB15,200 spot, dangerously close to the trigger point for other plants to reconsider their future.
Trouble is, the Henan Government may now have opened a can of worms. plants who previously might have brought out the circuit breakers at the RMB15,000 point, will now instead travel to their local provincial government office with a copy of the Reuters article (in Chinese of course), seeking their own rescue package.
And for those smelters that were the beneficiary of the Henan government largesse, they must be wishing it never got into the public domain. The RMB1,100 per tonne benefit they enjoyed two days ago has now been discounted by one third. A case of hello savings, goodbye savings.
A report just in from Reuters says that the provincial government of Henan province, the traditional home of China’s aluminium industry, in central China, has announced reductions of RMB0.08 per KWH to the power tariff for that province’s aluminium smelters.
According to Reuters’ sources, that will provide assistance of about RMB1000 per tonne of metal. Reuters has no other information on the story.
AZ China’s own analysis of the Cash Cost Curve shows that smelters in Henan province would be better off by RMB1,110, taking into account all the plants in that province.
In our recently published “AZ China Red Book”, we predicted that this tariff cut would come. Our view was that this would help shift Henan smelters towards and into the third quartile, and onto or slightly above the current metal price.
Theoretically at least. The unfortunate thing for the smelters who think that they have gained some relief from this move by the government, is that the market will likely eat the gain very quickly. This has already been shown - initial subsidies to a handful of plants over the last few weeks has resulted in the SHFE price slipping.
This announcement also tests the hopes of some corporations outside China that they will be able to eventually sell large quantities of metal to the Chinese market. Tariff cuts are designed to protect jobs, but they also keep the supply side of the market more liquid than needed. The price will drop, the arb window will close, and China will once again be blamed for the over-supply situation in the rest of the world.
And that’s the other unfortunate and unintended consequence. By protecting local jobs, the Henan government is effectively forcing other smelter groups outside China to go back to their fleets with a magnifying glass and a razor blade. Jobs saved in China will cost jobs elsewhere in the world.
By the way, with almost 3 million tonnes per year production in that province, and at RMB1100 per tonne, that works out to RMB3.1 billion in lost revenue for the province, or about US$500 million, on an annualised basis.
The news that the various levels of Australian government might step in to save Point Henry must be case of mixed blessings for Alcoa. I suspect it may put them in a difficult situation, when it comes to share price and market outlook. Saving Point Henry means capacity cuts are needed somewhere else.
After announcing capacity cuts at the start of the year, Alcoa has put off the shutdown in Italy and are holding out for lower power costs in Brazil. Now with talk of Point Henry being saved, it leaves them with a total capacity cut which is barely half the 12% they announced at the start of the year. So as they save jobs in Australia, which is great for the workers and the local community, the LME price weighs down further. There is still too much metal on the supply side of the equation.
(Sure, a lot of that metal is now frozen in finance deals, and it could be argued, as one CEO said to me, that a sale to a finance house is as good as a sale to a can company, but if the global economy stutters - not an unlikely scenario - and the contango slips into backwardation, that metal will come out of the finance houses very quickly.)
So Alcoa can only hope for someone else to take a haircut on capacity. But who? Rusal has been talking of capacity cuts for some months, but so far, no action to match the words. Rio is having its operational problems, but is pushing ahead with capacity increases in Kitimat, Cameroon and their new AP60 plant. Middle Eastern smelters are expanding, thanks to low cost energy. And Chinese smelters are now getting subsidies from local governments, which in some cases are 20% of their electricity price.
So as the Australian government works out a lifeline for Point Henry, most likely it will simply mean transferring the pain to another part of the world. Alcoa will need to set the example, as one of the few “aluminium-only” corporations in the top echelon of the aluminium world. They will need to take a haircut somewhere else, reduce the supply side of the equation, and be seen to be matching their words and their actions.
Otherwise, with the LME now heading further south, they risk the perception that they have failed to act decisively. Indeed, some analysts are already downgrading the company’s earnings outlook.
It’s a difficult call for the folks at the New York headquarters.
Australian newspapers this morning are predicting that there will be an announcement as early as this week regarding the future of Alcoa’s Point Henry smelter. And the prediction is that the Victorian State Government, possibly with the assistance of the Australian federal government, will come to the aid of the loss-making smelter.
Alcoa put the smelter under review a few months ago, as part of its review of assets in comparison to the outlook for metal price. Point Henry suffers from age (it is almost 50 years old), the relatively high cost of the Australian dollar, and the combined effects of the cost of electricity and the impending carbon tax (although, to be fair, the carbon tax was not cited as a cause.)
With LME prices below $2000, and the cost of production at Point Henry running well above that, the outlook was grim. Alcoa had been making noises about cutting capacity, in light of the glut of metal stuck in warehouses around the world, though the actual cuts that it has made have been somewhat less than the rhetoric. If a deal is struck in the case of Point Henry, it will be a great day for workers, and the local community (declaration of bias - I grew up there, and spent the first 13 years of my working life at that smelter), but it will do nothing for the dialogue currently under way around the world, that more capacity needs to come out of the global equation.
It will however bring Alcoa a small filip - the metal units from Alcoa that aren’t already committed can go into Japan, where premiums are north of $200. Of course, casting and shipping costs have to come out of the premium, so it’s not like there’s enough in there to make Point Henry tip into the black, but at least Japan premiums are negotiated quarterly, locking in the high price for three months, unlike other markets where premia move daily.
Soon as news comes of any deal for the smelter, we will bring it here.
HSBC’s early warning indicator, the “flash PMI” has come in at 48.1 this morning.
This follows May’s result of 48.4. Any result below 50 indicates a slowing-down in industrial activity.
This is the flash number - the sneak preview of what the final number is likely to be, when it is published on the 1st of the following month.
The HSBC PMI and flash PMI differs from the “official” figures. HSBC survey respondents tend to come from private industry and SMEs. But at least they don’t change the measurement rules. Our understanding is that the NBS quietly changed the rules for measuring PMI at the start of this year. The change was never announced, but if it is true, it accounts for at least some of the bump in the numbers a few months ago.
We announced on this site almost 2 years ago (see here) that Yankuang Aluminium Group is working in Australia to secure sources of bauxite and alumina. At that time, the plan was to build an alumina refinery, in conjunction with Bauxite Resources Limited.
More recently, at the Shanghai Aluminium Exhibition to be precise, Yankuang announced that they had secured mining rights to about 1 billion tonnes of bauxite in Western Australia. They are hoping to have the first phase started by the end of this year, though the press release doesn’t indicate if this means to start mining, or to start preparing the site. More likely the latter, as most mining opportunities in Western Australia require vast investments in infrastructure, even to the point of building towns to house the workers.
Yankuang made the announcement this month, but I suspect this has been part of an ongoing process since at least 2010, to secure bauxite outside the domestic envelope, which has a limited life.
Our monthly India report is just out today. It will be interesting to watch how the new auction system in India will play out in the coming months. If you are not a subscriber to the India report, we mentioned last month that all anode grade GPC producing refineries in India can now only sell their GPC production under an auction system restricted to end-users located within the state where the refinery was located. Quantities sold are also linked to production capacities.
Appeals from India’s two largest calciners have already been filed against this new legislation. More details in this month’s report, email us to subscribe.
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