Monthly Archives: September 2012
A lot of people have been asking us about the situation with supplies of bauxite from Indonesia. Now that the Indonesian export tariff is in place (putting 20% extra cost onto the material), and now that we have seen a steep drop in shipments, albeit with a slight rebound recently, what is the future for China’s aluminium industry?
We don’t see a big problem, as Indonesia is not a strategic long-term play for bauxite. Nevertheless, let’s look at one particular option available to the Chinese, as a substitute for Indonesian material.
India is one of the top 5 countries for reserves of bauxite, so must be considered in the mix. India’s bauxite reserves are mainly located on the East coast, in Andhra Pradesh and Orissa States.
The quality of the bauxite in these regions is roughly equivalent to Indonesian material. Freight costs run to about $20 per tonne in today’s market, putting Indian bauxite on a par with Indonesian imports on a CIF basis.
The principle problem with bauxite from this area has been man-made, with some political unrest in the area. Vedanta Aluminium has registered complaints with various government departments about the fact that they have been able to extract bauxite for their own needs, much less for export markets.
In the long-term however, the Chinese alumina and aluminium industries will need to rely on seeing their Government form bilateral trading agreements with India. With the ongoing tensions over decades (border disputes, water resources, etc), for China to gain better access to this material, a lot of ground will have to be given.
We will be attending the Asian Petcoke conference in Hongkong Oct 7-9. We look forward to having some good discussions. If you’re also planning to attend and would like to schedule a meeting with us, email charissa.trahms@az-china.com
It has long been a problem for analysts trying to understand the China aluminium market - how to quantify the volume of metal held outside the usual official storage locations?
Often referred to as invisible inventory, this metal could be anywhere - in storage locations not attached to the Shanghai Exchange (and related exchanges), tied up in finance deals, similar to those that plague the Western aluminium market, or even stored at the smelters, in carparks if the regular storage sites are full. (We know of one plant, there’s a tarpaulin mountain at the front of the plant.)
Now there’s a new location - at the customer’s inwards goods store. Some smelters are shipping metal into their customers without orders, or at least, without the customer intending to pay for the metal. Like a “consignment inventory” sale, the metal sits at the customer site until that factory actually consumes the metal, at which time he pays the smelter.
But here’s the rub - the metal is then used as collateral and a loan is taken from the local bank. The bank thinks it has a secured loan, the customer has no cash flow problems, and the smelter gets money from the production of the metal. A cosy arrangement - though a better description would be a “Chinese Ponzi scheme”.
Our sources of this information couldn’t answer our questions about what happens if the price of metal goes down, what happens if the bank tries to take possession of its collateral, and other questions that we had.
As usual in China, the problem is best left in the future.
October 1 is the date when Chairman Mao declared China a Communist Republic, so this country is about to go into a 1-week holiday to mark the occasion.
As usual, the authorities in their wisdom declared that we must work this Saturday, to tack an extra day’s holiday onto the week. The Mid-Autumn festival falls during this period as well.
The bottom line is that the AZ China office will be working tomorrow, but we will be closed for one week, re-opening Monday October 8. I will be checking emails through that time, so if you have any questions for us, please write to me.
(PS - in case you are wondering, Hong Kong only has 2 days off. They are back to work Wednesday 3rd. Some people we spoke to mistakenly thought that the public holidays in HK would be the same as in China. “One country, two systems.”)
In a move reminiscent of the 2008/2009 crisis, the Yunnan provincial government has reportedly offered to purchase 200,000t of aluminium from local producers. This is a large chunk of a total 300,000t of a variety of metals that have been included in the purchaser offer. Others include zinc, copper and some minor metals.
The metal purchase will be paid for by loans made available from local banks, with the provincial government picking up the bill for the interest charges on the loans.
According to the AZ China Red Book, there is about 1 million tonnes of primary metal capacity in Yunnan, across 7 smelters. So this is a sizeable chunk of inventory being taken out of the market, and should boost prices in the local area. The metal is to be held in local warehouses, under government supervision.
There’s no information on the rules for the sales transactions, or on the long-term strategy for the metal units themselves, but in 2009 the rule used by the SRB was that the metal had to be supplied in lots of 10,000t. If the Yunnan government does the same thing, the big winner will be Yunnan Aluminium, easily the biggest smelter in the area, with about 50% of the total provincial capacity. Yunnan Aluminium is a publicly listed company.
From my point of view, this is both a good move and a bad move. It ups the ante on Government’s stepping into the market, which portends further similar moves by other provincial governments around China. It’s highly dangerous and not a very sound strategy when governments intervene in markets.
But it’s also a good move, because this tactic is not likely to have the same impact as the power price subsidies given by other local and provincial governments. When governments cut power prices (directly or indirectly), the market reacts by dropping by about the same amount, as happened in July. By “buying” the output from the plants, the government is taking metal out of the market, at least for the foreseeable future, and that should cause the price to rise. One wonders if other provincial governments might follow Yunnan’s lead. (AZ China predicted that government assistance would likely increase before the end of the year. We also predicted that metal purchases would be one of the ways that this assistance might occur.)
Interestingly, Yunnan Government is also one of the 7 provinces providing power price subsidies to local smelters.
We have reported before about the move by Indian Oil Company (IOC) to auction their pet coke to local calciners. The auction was to be via the internet, and the cokes were to have a reserve price well above the then-current trading price. Several parties objected to the plan, including the Maniyar Group, who took the matter to the High Court of the local province .
Yesterday the High Court dismissed the Maniyar action. The e-auction will now go ahead today (September 25), with reserve prices ranging from US$300 per tonne through to $330. For comparison, low sulphur pet coke in China is selling for $250-$270 per tonne. That price is ex-works, as is the Indian price.
My bet is that several Chinese traders will be making phone calls and visits to India real soon.
This story can’t be verified, but it has a certain ring of possibility to it.
The story doing the rounds at the Metal Bulletin conference is of a dinner that took place Wednesday nighT between Rio Tinto Alcan and Glencore.
At the dinner, according to the story, Ivan asked Jacynthe, “How much do you want for Pacal?” “3-4 billion”, was the reply, to which Ivan is alleged to have replied, “How about zero?”
Surely the highlight of the conference. Tonight we were treated to an evening of Russian food, alcohol, singing, dancing and fairy tales.
UC Rusal took 5 busloads of us to the nearby Pushkin Museum and Theatre. As soon as we arrived, we knew we were in for a good time. Cossack men and women were on hand to greet us, as well as a belly dancer - probably originating from the gypsy influence somewhere in the south of Russia.
Inside, we faced a difficult decision - champagne, white wine, red wine, or vodka. Waiters dressed for the part came around, reprimanding you if they found you drinking anything other than vodka. On the side, a mermaid posed for photos. Magicians weaved their way through the crowd, performing simple tricks.
After a while, an actor representing Pushkin came out to welcome us to the UC Rusal Russian Fairy Tale night. A terrific laser PPT followed.
Then came the singers and dancers. Wow - that’s all I can say. Perhaps the stage manager will critique them for this wrong step or that wrong note, but the enthusiasm, the energy, and the joy, were intoxicating (or was that the vodka?)
An interval in the show gave us time to try the Biluga and red caviar on blinis, as well as the beetroot salad, and more vodka.
But pretty soon, the dancers and singers were out again, entertaining us with sword play, whirling skirts, and cossack dancing. And even a brief segment when audience members were taken up for a dance - including yours truly.
What a shame I am scheduled to speak at 9am tomorrow…
A big thanks to UC Rusal for the wonderful evening.
Coke markets get maligned again.
In the executive panel discussion this morning, Rhodri Harries of Rio Tinto Alcan claimed that coke and pitch prices are historically high. Vladislav Soloviev of Rusal agreed with him.
Trouble is, the facts don’t support the claim. Coke prices, at least in China, are 15% lower than they were 12 months ago. Since both Rusal and Alcoa get some of their coke from China, they are either paying too much (unlikely), or the folks in HQ as usual don’t keep up with the black products market. Despite carbon representing 12-14% of total costs.
Update: By chance, Mr Harries sat next to me at lunch time. I told him I disagreed with his view about coke prices, but he pointed out that he was referring to the ratio of coke price to LME price. That ratio has now moved up to as high as 18-19%, according to Mr. Harries.
While that is true, it’s not caused by coke prices moving up, but by LME prices moving down. And although there is some correlation between LME prices and crude oil prices, and therefore coke prices, it’s not to say that there is a causal link. And as soon as we get into such arguments, we delve into the cyclical pattern of coke price negotiations - when LME prices are low, aluminium companies argue that they can’t afford the price of coke, but when coke prices are low, they argue that they want a “fair market price”.
Good to see Glencore’s newest employee on the sidelines of the conference. Greg Baxter, formerly of Rio Tinto Alcan in Singapore, is now based in Zug, Switzerland, and startedI with his new company just over a week ago.
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