Monthly Archives: October 2012
Reuters today ran a story that suggested that BHP Billiton may be sniffing around some low-priced assets while prices are soft.
It’s an interesting idea, though I think Reuters got a couple of things wrong. They said “The world’s largest mining company, BHP Billiton was reported by an article in Businessweek to be interested in becoming a “one stop shop” for commodities buyers. To accomplish this, BHP Billiton needs to fill out the aluminum void in its metals lineup.”
BHPB may beg to differ on that last point. What was once known as the big Australian owns a bauxite mine and alumina refining asset in Australia, and has at least part-ownership of aluminium smelters in South Africa and Brazil.
BHPB has recently shoved its aluminium assets into the same division as nickel, effectively demoting the metal as a key market.
Nevertheless, it’s a good point, provided you believe the share prices are at their bottoms, and provided you believe there is upside out there in the future somewhere.
The first condition is probably met, at least for some assets. Alcoa’s share price is a fraction of where it once was. RTA has a portfolio of assets called Pacific Aluminium that Rio wants to eventually divest itself of. And there are other opportunities in all segments of the market.
But the primary aluminium market is still in a serious over-supply situation, with no signs at this stage that anyone plans to do anything about it. Alcoa has taken a small amount of capacity out, as has Hydro, and Rusal has announced plans to close a tiny portion some time down the road. But these token actions have done little to address the overhang. Somebody somewhere is going to have to take the pain on behalf of the entire industry. So if you are going to buy aluminium assets, it could be a great time - provided the cuts come from your competitor, not from the assets you just bought.
Another question that comes up is, if not BHPB, then who? It’s hard to see Chinese money making its way outbound, although some SOEs may be running a calculator over some assets. Perhaps someone like Glencore, or any other large metals trader who wants to control premiums and metal units? It’s speculation at best, but worth keeping an eye out for any signs of asset buying activity.
The EU has today made a ruling that China must pay tariffs of up to 61% on the export of aluminium radiators.
The ruling comes as a result of an investigation of allegations of dumping, as Chinese-made aluminium radiators gradually ramped market share in Europe. Producers in Italy and Poland sought the investigation and ruling.
This comes on top of rulings and tariffs on other aluminium products in other parts of the world - both the USA and Australia successfully applied to the WTO on Chinese exports of certain extrusion shapes, for example.
As China’s aluminium stockpiles grow, several commentators have asked the question, will we see increased subsidies from Beijing to support the export of metal. Those subsidies are unlikely to come in the form of direct challenges to WTO rules, but they are already coming in the form of low-interest loans and other indirect support mechanisms.
In case you missed it in the business press, below is a copy of the press release that Rain CII issued regarding their purchase of Ruetgers. Ruetgers is a major producer of coal tar pitch (CTP), based mainly in Europe.
Rain CII has taken on a lot of debt to make this purchase, taking Ruetger’s US$242 million to add to the debt remaining from the merger of Rain and CII some years ago. But it still appears to be a good deal for Rain CII. It gives them market access in places such as Europe and the Middle East. It also offers some reasonable opportunity to “blend” offerings to customers, finding a sweet spot of CTP and CPC specifications, though that’s probably a tiny advantage. Anode manufacturers in Europe and the Middle East may also find that having the same supplier for all their anode ingredients may offer some synergies - payment terms, delivery schedules and so on.
A more interesting question is, now they have all the ingredients to make an anode, will Rain CII go ahead and start making anodes? Perhaps a natural extension of their new CPC capacity in India - build an anode plant there, and offer customers a complete one-stop shop?
Time will tell. Here is the press release.
Rain CII Carbon LLC (RAIN CII) has agreed to acquire RÜTGERS N.V. (RÜTGERS), a Belgium-headquartered coal tar pitch (CTP) manufacturer, from funds advised by Triton (Triton).
On October 21, 2012 RAIN CII executed a share purchase agreement with Triton to acquire a 100% stake in RÜTGERS for a gross enterprise value of €702 million. RAIN CII is planning to fund the transaction through a combination of internal cash accruals and issue proceeds of €533 million of long term bonds. The transaction is expected to close in the 1st Quarter 2013, subject to the regulatory approvals and customary closing conditions.
The acquisition of RÜTGERS is complementary to RAIN CII’s core business of calcined petroleum coke (CPC). Expanding into the tar distillation business constitutes both product and geographical diversification to Rain Group and provides vertical depth within its core business. RAIN CII is engaged in the businesses of production and sale of CPC and the co-generation of energy (steam and/or electricity) through waste-heat recovery. It is one of the leading global producers of CPC, with nine production sites worldwide. For further information, please visit www.raincii.com.
For more than 160 years, RÜTGERS has been setting standards as a manufacturer of high-quality basic and specialty chemicals. The company has approximately 1,000 employees at eight international production sites working for the success of its customers. Its focus is on reliability: it maintains the highest standards to protect people and the environment. RÜTGERS secures its supply of raw materials, and it operates an efficient logistics network to ensure on-time supply of products for the aluminum and steel industries, technical oils, naphthalene, and other basic chemicals. RÜTGERS has achieved gross revenues of €831 million for the financial year ended December 31, 2011. For further information, please visit www.ruetgers-group.com/en.
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In the previous post, I talked about what it is like to get down onto ground level and to understand the realities of trying to build an aluminium smelter in one of the harshest environments going (not that Iceland or the deserts of the Middle East aren’t also harsh.)
Now I want to get back into the helicopter, so to speak, and to review what’s going on in Xinjiang and the Northwest of China.
The view from inside the helicopter
There has been a lot of press about the growth of the aluminium industry in China’s Northwest. Several commentators have called for more restraint and stricter controls on the development push, citing lack of water for the power stations, logistics issues, consumption of scarce resources, environmental impacts, and so on.
But when you get up there, issues such as these take on a new perspective.
Inside the industry there, the view is that there are two groups of smelters and two kinds of outcomes. The locals refer to East and West, meaning that there are two clusters of plants either side of the local water source. And the two outcomes are those smelters that are being built to rigorous standard and will succeed, and the rest.
The focus of all the smelters in the area is to complete construction as soon as possible. The way one Plant Manager put it to us was, questions regarding cost of metal produced and the operating margins compared to SHFE prices are for another time. Right now, they can save money by building the plant as quickly as possible, and are guaranteed a profit just by getting metal flowing as soon as possible.
Logistics? At one plant, alumina is being shipped from as far away as Shandong province, and finished metal is being shipped to Guangxi and Guangdong provinces, which is about the longest diagonal line between China’s northwest and southeast. Why are they shipping metal so far? We were told that is where the markets are. And the cost? One man told us the money they save on electricity costs compared to their smelter back east easily takes care of the additional cost.
It was clear from our brief visit that the reality is that the expansion program in Xinjiang is set to continue. The challenges won’t come from Government intervention, or from issues such as the environment, energy costs or logistics. The real challenge is to simply get the project finished on time in one of the remotest parts of the planet.
We will be discussing Xinjiang and the expansion programs in more detail in the next AZ China Red Book. If you are interested in truly understanding what’s going on inside China’s aluminium industry, be sure to get your subscription to this important publication.
As analysts and commentators, many of us spend time looking at the big picture. It’s certainly important to have a helicopter view, but every now and then, it’s also important to get out of the helicopter and get down and dirty. This and the next post will describe our recent experience in and out of the helicopter, so to speak.
Out of the helicopter.
We paid a visit to Xinjiang province last week, to go see for ourselves what is happening out there where all the new smelters are being built.
Out of the helicopter, the first thing you notice is mud. Building a new smelter in the remotest corner of China is no holiday - at a plant we visited last week, it took fully 5 minutes to walk from the office to the restrooms 50 metres away, because the area in between was a sea of mud. And the office? That was a worker’s hut, with 3-inch thick walls, which is just as well in an area where the temperature drops to minus 20c. The plant manager at this plant told us he had been working out of a tent until a week ago.
This particular plant was a good example of what is happening in Xinjiang. Construction is unbelievably rapid. In a mood similar to “win at all costs”, the construction team’s number 1 goal is to get the smelter operational as quickly as possible, even if it is only one line at a time, and running at 2/3 speed.
This particular plant was rated at 460KA, but when we toured the line, we saw that the pots were running at 420KA. Voltage readings were showing 4.1v, and DC rate was coming in at 12,500kwh. They were clearly having some issues with anode effects, because there were numerous light killing poles with long black ends. But the plant was running, producing metal, and the team was now focusing on getting line two up and running before the end of the year.
This is going to be no easy task. I say that because it seemed that at least 50 pot shells were still stacked outside the building, in the mud, along with superstructure assemblies.
This team was in a race, competing against the weather, financial targets, other smelters in the area (for labour for instance) and against their own targets.
This smelter has its own power station (and will eventually grow to 3500MW). But indicative of the “wild west” atmosphere was the fact that while we were there, the coal supply company representatives came in and started negotiating the next delivery of coal with the plant manager. Still when he is paying RMB50-70 for coal which sells on the east coast for RMB700, it’s no wonder that aluminium companies are making the dash to Xinjiang.
Next post, I will discuss the perspective from inside the helicopter - once I get the mud off my shoes.
The Black China Blog was recently named as one of the 50 best blogs to learn all about China. A very nice recognition! There are a few other very interesting blogs on that list as well for anyone interested in China.
AZ China has also been featured in the Sept/Oct edition of Aluminium International Today (AIT). Paul wrote an article entitled “How technology saves the Chinese aluminium industry”. The article covers just how far China has come since their first prebake smelter in the 1970’s. More info about AIT’s magazine can be found on their website.
As if China doesn’t have enough metal in the supply chain already, another smelter threw the electricity switch into the “ON” position in the last couple of weeks, while a second smelter issued a press release that they were on track for ramp up mid 2013.
Henan Huoshen turned on the first line in their Xinjiang smelter last month, bringing 100,000t of capacity online. Recognising the soft conditions in the market, Huoshen have decided to delay the remaining 300,000t until the situation improves.
Meantime, Ningxia Qinyi Aluminium announced that they are on track to bring their phase 1 smelter on line by July 2013. The first phase will be 500,000t, with another 500KT coming in stage 2.
We at AZ China are fond of saying, if we could see all the hidden metal inside China, it wouldn’t be called “invisible inventory.”
China continues to push out lots of primary aluminium, despite the slowdown in China’s domestic economy and lacklustre export markets. So where is all that metal going?
We have previously reported stories of consignment inventory, where smelters ship metal to customers in spite of a lack of orders. That metal is then put in as collateral at banks, who give out loans, allowing the smelters to be paid. That’s a perverse form of “finance deal metal” that pervades the international aluminium market.
But it is only one place where metal is stored outside the “official” warehouses attached to the Shanghai and other exchanges in China. Some metal is traded off market, while other metal is used as direct collateral with banks and local governments in return for relief from debt.
Still more metal is held at smelters. When the finished goods areas are full, smelters will park the metal in carparks and other areas around the plant that have adequate foundations (no point in dropping a 1 tonne pallet of metal on the bare earth, if that ground is subject to flooding, mud, clay or other barriers to extracting the metal. Car parks make excellent metal storage pads.)
We don’t have an accurate number for how much metal is sitting in China. In February of this year, CRU estimated it to be 1.4 million tonnes. It has got to be significantly higher than that by now. After all, conditions have only worsened, governments are propping up smelters with subsidies, others are buying metal for “strategic reserves”, in addition to the 270,000t already in Beijing’s strategic reserves, and the arbitrage window was open for a while, allowing metal to be brought into the country.
If the rest of the world has a total inventory of at least 3 months supply, perhaps even 4 months, then it is hard to see good reasons why China should be any different. Of course, China’s interest rate regime and lack of contango has prevented the large-scale finance deals of Europe and elsewhere, but even so, China’s total metal supply must be sitting at or above 2 million tonnes.
Seems the latest craze in the carbon market is to own a calciner, preferably one you built yourself.
Just take a look at the list of projects and expansions that we discussed during the last couple of days at the Jacobs conference here in Hong Kong.
* ZCGG Surun’s 500,000t calciner will start pumping CPC out in the next 2 months;
* Sinoway Carbon’s 280,000t calciner will be producing marketable coke by February
* Goa Carbon’s calciner in Canzhou (near Tianjin) will be operaitonal by the end of 2013;
* DQ Carbon has settled on their technology provider and will aim for operational status by early 2014;
* Weifang Lianxing is now building a small calciner in Zibo, not far from their 600,000t plant, which finished its expansion less than 12 months ago;
* Meanwhile, we understand the Rain CII plant is on schedule;
* Gasan in Saudi Arabia is also progressing, though not as fast as Gasan wants;
* Takreer in Saudi Arabia will also build a calciner, integrated into an oil refinery there.
* ICTC has commissioned NFC and NEUI to build a calciner in Egypt, with anticipated volume of 300,000t in phase 1, and due for completion the end of next year.
All this activity raises all sorts of questions about market saturation, supply of calcinable green coke, and of course return on investment. Buyers will be spoilt for choice, assuming all these projects come to fruition.
AZ China specialises on deep dive analysis of the calcined coke market. If you want more information about what is happening, and what is likely to happen, contact us at blackchina@az-china.com.
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