Monthly Archives: April 2013
In case you can’t get enough of what we have to say, you can also follow us on Linkedin. I am not quite sure of the value of Linkedin yet, but it seems to be something that people get into.
There are several groups you can join in Linkedin, and one which I am in has had a discussion thread on the lack of correlation between metal and raw materials. Here’s what I posted to that discussion.
This discussion appears to be short on facts. On the CPC side, the previous comments about China’s position exhibit a complete lack of knowledge of the CPC market. Oxbow in the USA produces about 2 million tonnes per year. Rain CII in the USA and India produces about the same. BP in the USA produces about 1.4 million, from memory.
Surun/ZCGG, the largest producer in China, produces about 1 million tonnes, and that’s because they just finished a major expansion that almost doubled their capacity. Then there are a handful of “export quality” producers in China, but all together, China only exports about 1 million tonnes. India has three major calcining companies, while Alba in Bahrain offers about 400kt-500kt, from memory. Kuwait also produces some CPC. Oh, and don’t forget the European producers.
There are a large number of merchant anode producers in China. The largest is Sunstone, with companies such as Jining Carbon and the former Great Wall Carbon in there as well. Altogether, China exports about 1 million tonnes per year. Egypt has a merchant anode plant, and then there is Aluchemie in Holland, that is part-owned by RTA and Hydro.
The break in the vertical linkage is not as strong as made out. As Paul Williams said, some companies are long on alumina, but for decades now, smelters have been built on a less than complete vertical chain basis. And there are no aluminium companies that I can think of that are long on carbon. They may have carbon plants, calciners etc, but none of them own the means of supply of coke, namely an oil refinery with coker.
It’s no wonder that companies such as Mubadala and Oman Oil Company, who both own smelters in the Middle East, are investing in supply of carbon from China.
China’s traditional model was for smelters to be supported by a common carbon plant. Especially in Henan province, the traditional home of China primary aluminium, smelters were typically too small to warrant a carbon plant, so one anode plant might supply 4 or 5 smelters. Nowadays, the model is shifting as China moves into mega-smelters. In Xinjiang province, the new home of China aluminium, smelters exceeding 1.5-2 million tonnes in capacity are all planning to have their own anode plants.
But although many of them own the means of supply of electricity - power stations - few of them own the means of supply of alumina - Xinfa, Chalco, Weiqiao and one or two others are the exception. And still, none of them own the means of supply of carbon.
Back in January of this year, we published on this blog a little piece about a story doing the rounds that Century Aluminum would acquire Sebree smelter from Rio Tinto Alcan.
Today it came true.
Century has announced that it will acquire the smelter, though not any grandfather liabilities relating to environmental issues or pension funds. In another announcement, Century has indicated that a deal concerning electricity prices might finally be brought to reality.
I understand from certain sources that the ultimate plan may include closing the Hawesville smelter in favour of the more modern and more efficient Sebree plant.
If you want to keep in touch with what is happening in the aluminium and raw materials markets before it gets into the newspapers, bookmark this site.
China’s numbers are wrong!
Well, that is no surprise, since they have ALWAYS been wrong to one extent or another!
The most cited example in aluminium is the production number. NBS does not count “illegal” smelters such as the Shandong Weiqiao plants. These smelters never went through the proper approval process, so they are not included in the production data. The NBS production number therefore undershoots the real number. The other example is the NBS monthly production number for the first few months of each year. This has been well documented by Paul Adkins of AZ China. Paul would tell you that the Q1 numbers do not make any sense on a tonnes-per-day basis.
Other numbers do not take into account discontinued series or they simply do not add up!
It is sure embarrassing for the NBS. But, everyone knows the lack of data accuracy inside China, even the policy makers themselves. New Premier Li Ke Qiang even went so far as to call China’s official numbers as being “for reference only.”
If one turns up at a macro economic conference in China, he or she would find that the standard ‘two men walk into a bar’ joke has been replaced with NBS data manipulation jokes. Policy makers tend to give their own private estimates on the data during meetings and conferences. After talking to employees who have worked at the NBS or other Chinese industry associations, one would find out that ‘number making’ and ‘poor methodologies’ are ongoing practices.
Does it matter? Yes and No. For accuracy’s sake, the numbers do not paint an accurate picture of reality; they are therefore misleading on many occasions. When numbers get so grossly out of whack, they can result in misallocation of capital. Arguably, the inability for foreign investors to read China clearly has been a result in part of these inaccurate data. However, the numbers provide more of a guidance than an accurate pin on any one asset, socio-economic phenomena or productive activity. The system can work with numbers that are inaccurate provided they are not completely off-track.
The market tends to adjust the released numbers to deal with poor quality data; the methods of adjustments vary from one user to the next. However, we would argue that poor data are part of the risk to the Chinese economy, because without good data, there is likely to be poor decision making by policy makers and investors. The lack of data on shadow banking is a good example of how poor data undermines risk management and market well-being.
Other areas of questionable data include:
- Electric power - Overall power demand is up 4.3% YTD, yet, thermal power utilisation went down 7.2%. Thermal power utilisation is highly measurable, since it requires coal. According to the NBS, the difference between demand and supply was made up by hydropower, which made a miraculous 16% improvement in the same period. Just as well it is harder to measure waterflow.
- Steel - Steel production has been reported at record levels, though demand has barely changed. According to Anne Stevenson-Yang of J Capital Research, this is because plants which do NOT report to the Industry Association magically increase their production levels at the same time that those who do report to CISA are closing blast furnaces.
- PMI - At least 3 times in the last 12 months, the China Logistics Association has changed its sampling and methodology for measuring PMI, but has never disclosed how they changed, nor bothered to produced any comparison data.
- Retail Sales - This is a major sector for China’s economic hopes, and has been reporting growth of 12% YoY. Yet the number of sub-sectors being dropped from the measure continues to grow. Since December 2012, food, grain, oil, meat, tobacco, liquor, books and other items have all been dropped from the measure. Coal metals and fertiliser have not been in the Retail Sales figures since 2010.
How is it that the NBS can be so wrong? Perhaps the best way to understand how official data works in China is what Anne Stevenson-Yang says. “The modern NBS is like a priesthood, providing moral guidance to the work of data collection. Is news at the grassroots is not harmonious, best that it should simply go unreported.”
Everyone knows China expanded its aluminium capacity sharply in the last few years, even if affected to a certain degree by the financial crisis in 2008. And most people know that China now represents roughly 45% of the world’s production of the light metal.
But do you know what the score is on a numerical basis?
By the end of 2010, coming out of the global economic crisis and with wads of capital flowing, China owned 96 aluminium smelters with total capacity of 22 million tonnes per year (tpy).
Right now, China has 92 smelters, with capacity of 29 million tpy. (That capacity number includes about 5 million tonnes of idled capacity - plants which could come back into the market if the price warranted.)
For the rest of world, there were 117 aluminium smelters with total capacity 29 million tpy by the end of 2012.
China aluminium capacity accounted for 30% of global total capacity by the end of 2010, but 50% by the end of 2012. Is it any wonder that the traditional engineering and technology companies that had long survived and thrived on global expansion of the industry are now turning their attention to China.
In those few years, China’s average capacity grew from around 230ktpy per smelter in 2010 to 320 ktpy per plant by the end of 2012. So although China is producing about 45% of the world’s metal, the fact is that China right now really represents about half the industry. Add to that the new capacity being built around China, another 4 million tonnes, and the fact is that China will be the dominant producer within 2-3 years.
For the sake of the rest of the industry around the world, let’s hope that China continues to consume the metal at equivalent levels.
After a few turbulent weeks, the SHFE aluminium market has proven to be resilient. The stabilization effect from the SRB purchase has been aided by cuts to the supply side. Macro risk has re-emerged, this time in growth prospects rather than inflationary pressure. Outlook for destocking, even a late destocking scenario in 2013 is under scrutiny given concerns about China’s recovery.
The latest closure/production cut comes from Chalco, in Guizhou province. Chalco’s 450kt smelter there has suffered a 135Kt cut. This perhaps can be deemed as both necessary and a good news for the entire industry, which is suffering from gross overcapacity.
Total closures/production cuts combined with those announced planned cuts equal to a total of 896Kt. Together with the 300SRB purchase, which is still being delivered in April and May, gives almost 1.12Mt. We estimate the market excess is at 1.8-2Mt for 2013, which means the cuts are still not enough. The market should also bear in mind the new capacities that have come on, which is exacerbating the problem.
With the 3rd and 4th quartile smelters operating underwater on a cash cost basis, we see more closures/production cuts coming. While metal price is moving more sideways than falling, and inventory appears to be showing some stabilization recently, we remind the market that the overall oversupply situation has not changed fundamentally.
Some supportive data on price, trade and manufacturing came through lately. These add to suggestions that the demand side is recovering (though many commentators have raised doubts about the accuracy of some trade statistics).
On the supply side, we count a total of 711Kt of confirmed closures/production cuts so far and another 50Kt of unconfirmed capacity closures/production cuts. But this has almost been wiped out by 600kt of new capacity entering the market.
The combined net figure of SRB purchase and closures/new starts is now about half a million tonnes. This scenario should help underpin the SHFE aluminium price in 2013. However, we estimate the excess to be somewhere around 1.8Mt to 2Mt by the end of 2013. This means we are still in oversupply.
The National Bureau of Statistics (NBS), together with the China Nonferrous Industry Association (CNIA), quietly issued the statistics for March 2013 last night. The publication was almost 2 weeks late for the NBS.
According to the release, March saw 1.73 millon tonnes produced. That sounds like a big number, until you break it down into a daily run rate. On that basis, March came in at 55,900 tonnes per day.
The same authorities previously reported February as being 61,800 tonnes per day, so March suffered a drop of almost 10%. In fact, March’s daily run rate is the lowest since November last year.
Considering February was reportedly an increase of almost 10% over January, it illustrates just how unreliable the Chinese official data is. to achieve these sorts of swings, operationally you need hundreds of pots to switch on at the start of February, then magically switch off again on March 1.
The truth lies outside the official numbers. In China, official statistics are rarely based on real data, but more on what people want to hear. We will have another post shortly about the way that China’s official statistics work (or not, depending on your viewpoint.)
Beijing is often described as the world’s biggest small town. It is amazing how often this adage comes true. Just this morning I bumped into former Australian Prime Minister Kevin Rudd in our local coffee shop. (Mr. Rudd’s daughter lives here in Beijing.)
Same too when I visited the offices of a very large technology/engineering company a couple of weeks ago. On their big screen TV was a welcome message for two visitors from a Europe-based smelter.
So if you are passing through Beijing, be sure to look us up. The AZ China office is very close to the CBD district and the major thoroughfares of Beijing, as well as to the subway lines, so it is very easy for us to come to your hotel, or for you to come by our office and meet us.
The coffee pot is on…
There are signs the low Aluminium price, coupled with high cash costs, is starting to seriously hurt the industry.
According to our sources, a meeting was held in Beijing a day or so ago, with representatives from Chalco, Henan Shenhuo, Xinfa, CPIC, Nanshan and others in attendance. The agenda was simple - cutting production. Unfortunately for them, no consensus was reached.
Meantime, China Nonferrous Industry Association has hinted that the Government is also looking at measures to help the Aluminium industry. So far, the measures being considered do not extend to direct intervention. Rather, the government is looking at ways of stimulating demand, with plans to increase the intensity of Aluminium consumption in autos, power cables and furniture. On another level, the NDRC is also looking at ways of promoting energy savings and emissions reductions.
Something as to be done. The market is seriously over-supplied, but cutting production is the last thing anyone in the industry wants to do.
Some supportive data on price, trade and manufacturing came through lately. These add to suggestions that the demand side is recovering (though many commentators have raised doubts about the accuracy of some trade statistics).
On the supply side, we count a total of 711Kt of confirmed closures/production cuts so far and another 50Kt of unconfirmed capacity closures/production cuts. But this has almost been wiped out by 600kt of new capacity entering the market.
The combined net figure of SRB purchase and closures/new starts is now about half a million tonnes. This scenario should help underpin the SHFE aluminium price in 2013. However, we estimate the excess to be somewhere around 1.8Mt to 2Mt by the end of 2013. This means we are still in oversupply.
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