Monthly Archives: July 2013
The recent upset to the plans for Gove Refinery to receive natural gas is likely to cause problems for Indonesia’s government.
That’s because, if Rio Tinto decide it’s all too hard and go ahead and close the refinery, that will release up to 8 million tonnes of additional bauxite int the south east Asian market. That in turn could cause Chinese refiners to hasten slowly with their plans to build capacity in nearby Indonesia.
The Chinese aren’t in Indonesia by choice. They are there only because the Indonesian government has decreed that they will stop the export of base metal ores such as nickel and bauxite from 2014, with the only exceptions being those exporters who commit to building refining capacity inside Indonesia.
While one has to respect the Indonesians for trying to promote their own economy, keep the value add internally and create jobs, all those lofty ambitions could fall apart if RT releases Gove’s bauxite into the market. China does not need additional refining capacity, especially if it is sitting outside China. Despite the increased shipping costs for shipping ore versus refined alumina, the Chinese will always want to have control over their landed assets. Indonesia’s recent politico-economic history has been good, but it is a country where industries could be nationalised if the right conditions were in place.
All this is speculation based on a premise that RT might release the Gove bauxite, so the question is, how much chance is there that this will happen? That’s hard to answer, since there are several competing forces at work inside and around this decision. But it certainly would not hurt RT if they did go in that direction.
By the way, don’t listen to some Chinese alumina producers who are making spurious claims about Indonesia. We heard one producer claim that they were the only Chinese company with formal approval from the Indonesian government to continue exporting bauxite after 2014, when in fact there are at least 3 that we know of who are in joint ventures or are building capacity in that country.
All of which could be a waste of money if Australian bauxite supply took a jump up.
In our previous post, we talked about the disconnect between Gove alumina refinery and the local gas company. They are reportedly at loggerheads over who should pay for the gas pipeline that would bring natural gas to the plant. The gas was to come from the local government, who made a decision to divert gas from residential use to the refinery.
Now one of our readers (hat tip to Therese for the lead) has sent me a news article that came out today. The news article reports that the northern Territory Government has revoked their offer of gas, and replaced it with a new reduced offer. According to the news article, the new offer is for 195 petajoules over 15 years, instead of the previous offer of 300 petajoules over 10 years.
The reason for the change of heart stems from a change of head. The Chief Minister who made the gas offer at the start of the year has been ousted from his job, and his replacement has issued a statement saying the original offer carried too much risk. The new Chief Minister says the offer was never locked down, so there was no problem to rescind it. It will be interesting to see RTA and Pacific Aluminium’s response to that stance.
But the diluting of the gas offer, which according to the news article will force Gove to run on a mixture of diesel and natural gas, seems to me to be a final nail. It just doesn’t make any sense to run furnaces on two different ignition and fuel systems, and it makes no economic sense to remain operating at a loss, even if that loss is mitigated by the use of some natural gas. If I were Pacific Aluminium, I would be sending my sales team out into Asia, looking for long-term supply agreements for Australian bauxite - bauxite that used to go through the refinery at Gove.
Reports from the Northern Territory are suggesting that there are some fissures between the negotiating parties working on the proposal to put a gas pipeline into the Gove Refinery.
Gove, which is owned by Pacific Aluminium and which is located in a remote corner of Australia, has struggled for years with its operating costs, because of the need to use diesel oil in the furnaces. Diesel is much more expensive than natural gas, and some reports suggest that Gove runs at a loss of about $30 million per month.
The Northern Territory government agreed to release gas allocations from residential use and have it diverted for use by the refinery. The government also agreed to underwrite the $1.2 billion bill for the pipeline.
But that still leaves Gove and the owner of the gas to agree on who is actually going to build the pipeline. The gas company say it is up to Gove, since they need the gas. Gove is not saying anything.
Both parties have a lot to win and a lot to lose. The gas company can argue that they will sell the gas regardless whether it is to Gove and the NT Government, or to the residents of that State. Gove can argue, to the Government as much as to the gas company, that 1500 jobs are at stake.
But the real deadline to this debate may come next year, when the Indonesian government is set to introduce their bans on bauxite exports (except to those exporters who build refineries in that country.) That will probably cause the international price of bauxite to rise, making the Gove plant look like a giant lemon. Pacific Aluminium could simply sell the bauxite on the open market, and turn a loss-making situation into one that earns up to $100 million or more.
That would cost the region most of those jobs, and would mean that the Gove refinery would be written down to nothing. RTA as owner of Pacific Aluminium has already taken a huge $28 billion writedown, mostly on aluminium assets, so the Gove Refinery probably hasn’t got much left in value any way, but it would be a difficult decision to make to close the plant, since its owners over the years have poured billions into upgrading the plant.
It would also be a huge embarrassment for the NT government, which went out of its way to save the local jobs when it made the gas deal earlier this year. And that may well be the final trump card in this game. Political considerations may well prevail, though it is difficult to see how the Government could act. Come up with the $1.2 billion itself? Build the pipeline then charge a carriage rent on Gove to recoup the cost? That would be a huge risk if RTA or some future owner decided to close the plant in any case.
The spot price of aluminium seems low at the moment, struggling around the $1750 - $1800 range. But that price is set to look much better compared to where aluminium will be in the coming couple of months.
The storm clouds are now gathering, and there are clear indications that metal currently locked in financial deals in Europe and especially in the USA will come into the market in a flood. That will not only kill the metal price - the premium is also set to fall. Add to that metal coming from other new sources, and the picture looks decidedly grim.
Aluminium companies that don’t hedge their metal are particularly exposed, as are those who are booking premiums into their profit expectations.
What’s more, some of the coming problems have been caused by certain players in the industry taking a unilateral retaliation against those other players who are not playing ball.
It’s going to be a rough ride the next couple of months. (You may have noticed I have not explained why I expect prices to fall. Our subscribers and clients have full access to the latest developments and analysis. If you aren’t on our mailing list, join up today!)
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AZ China’s latest Aluminium Monthly Handbook, June 2013, covers global commodities and economies with a focus on the aluminium market and China.
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The weakening of the Indian rupee reflects the country’s high current account deficit and lower capital inflows, but Moody’s stated it might not significantly impact India’s foreign debt repayment capacity. The rating agency’s current rating for India is BAA3, the lowest stable investment-grade level. Fitch Rankings and Standard & Poor’s however maintain the outlook as negative. The Indian currency slumped to a record low of 61.21 rupees to the US dollar, a drop that had a cascading effect of an increase of between 15 to 20 per cent in the prices of petroleum products and edible oil. A global sell-off has made the rupee currency the worst-performing emerging Asian currency so far this year. The rupee’s relentless fall has almost dashed hopes for an interest rate cut at the Reserve Bank of India’s (RBI) next monetary policy review on July 30, inflationary pressures having increased. And despite efforts by the government to control gold imports, Indians continue to buy the metal.
Headline inflation during June 2013 rose to 4.86 per cent, driven by higher food prices, adding to the economic challenges facing the Indian government and reducing the odds of an early national election. The inflation data followed on the heels of a contraction in industrial output, a fall in exports and higher retail inflation (up at 9.87 per cent), suggesting that a recovery from the downturn is still far off. Inflation has been a major factor in the declining popularity of the Congress-led coalition government. A sharp moderation in price pressures in recent months had given the beleaguered government hope ahead of a string of state elections scheduled this year and the national election due by May 2014.
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Reforms in India’s power sector began gathering pace as a “pass through” of imported coal costs was allowed under modified Fuel Supply Agreements (FSAs). The sector still faces constraints in terms of gas availability and pricing, environment clearances, the state electricity boards’ financials and rising debtors. Overall power generation increased 5.7 per cent YoY in May 2013, as a result of growth in generation by coal and hydro based plants.
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India’s exports during June 2013 declined for the second consecutive month, falling by 4.6 per cent to US$ 23.79 billion as compared to the same month a year ago. Imports fell by 0.4 percent during the month to US$ 36.03 billion YoY. The trade deficit declined to US$ 12.25 billion in June 2013 from US$ 20.14 billion in the preceding month, albeit higher than the US$ 11.24 billion deficit YoY. Exports during 1Q2013-14 declined by 1.4 per cent to US$ 72.45 billion as compared to the same period a year ago, but imports rose by six per cent to US$ 122.64 billion. Given the rise in imports against exports, the trade deficit for the quarter widened to US$ 50.18 billion during the quarter from the US$ 42.22 billion level YoY.
India’s primary aluminium and aluminium items imports during May 2013 increased by almost 12.5 per cent over the April 2013 value to US$ 307.44 million.
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Passenger cars sales in India declined for the eighth straight month, dropping by 7.24 per cent for 1Q2012-13. Overall, the vehicle industry registered a drop in production of 4.73 per cent in June YoY, and overall domestic vehicle sales during 1Q2013-14 declined by 2.1per cent YoY.
We have been reporting here and in our client briefings about the recent rash of capacity cuts and smelters being idled in the last few months. Altogether our research has identified almost 20 smelters and a combined total of 2 million tonnes of closures so far this year.
Much of the narrative surrounding the recent cuts has been about the resolve being shown by China’s new leadership. President Xi and Premier Li have been refusing to buckle under the pressure of calls for relief from the slowing economy, and it has been in this context, and with surplus capacity blighting the metal price, that smelters have been forced to close.
But now the first cracks may be appearing, though admittedly not at the central government level, yet. Baise Yinhai Aluminium has just announced that they will restart their smelter, thanks to a subsidy that the Guangxi provincial government will pay. According to the reports, Baise will receive a subsidy of RMB0.05/kwh. Baise owns a second plant called Laibin Yinhai, also in Guangxi Province, which will also restart after receiving the subsidy. Between the two plants, it means a total of 400kt of metal capacity returning to the market. We estimate the value of the subsidy to be about RMB660 per tonne of metal, and brings them to a point where they can break even on a cash cost basis. (Shameless plug - contact us for more information about our Cash Cost Curve analysis services.)
The timing is impeccable, as it is almost exactly 12 months since the last round of government subsidies were introduced. Those subsidies were for similar amounts, though they were more heavily disguised as incentives, with some in the industry adamant that “no money was changing hands”. Of course it didn’t have to, as smelters simply deducted the value of the subsidy from their electricity bills.
Guangxi Government was one of the governments that provided a subsidy last year, though it expired at the start of this year. Baise was the beneficiary.
It’s a worrying sign. The aluminium industry needs to take the pain of some capacity cuts, to get itself in balance again, especially as demand proves to be a little weaker than expected. And the Central Government has been employing strong rhetoric in recent months, with its industry mouthpiece the CNIA talking of industry consolidation. But governments at the local level have a different agenda, one which revoles around social stability, full employment and generating GDP. Remember, individuals in their bureaucratic and political roles, as members of the Communist Party, are measured on their individual performance, and GDP performance at a local level is one of the main measures.
The Shanghai metal price remains in the doldrums, sitting at the RMB14500 mark on a cash basis. Actions such as this by the Guangxi provincial government will do nothing for the price, much less the health of the industry.
Late update: Thanks to Gayle Berry for alerting me to this - Guizhou Province has also recently changed their rules on electricity pricing, allowing smelters to take power directly from power stations, rather than through the grid. It is a small saving, since transmission costs are only a fraction of the total cost of electricity, but it is yet another crack in the resolve to see the industry rebalance itself. A reduction of electricity costs, which are the highest cost element in the production of aluminium, is no help to the central government’s efforts. Guizhou doesn’t have a lot of aluminium production capability, but the real problem is that it sets an example for other provincial governments, as does the Guangxi action.
Two new smelters have announced their start-up, even amid the gloom that has descended the China aluminium industry.
Chongqing Energy started their first pots about 2 weeks ago, according to their press release, and will have all pots operational by the end of September. Their capacity is rated at 300,000t.
Meanwhile, Dongxing Aluminium (which means East Hope, but isn’t the same company as East Hope Aluminium) will start their new behemoth next month. I say behemoth because this plant, in far northwest Gansu province, will jump to 900,000t capacity. But that’s not where it will stop - the plant will produce 3 million tonnes by the time it is complete, according to the corporate long-term plans. The new potline will run at 500KA - an amperage that was only dreamed about some 8 - 10 years ago, but which is now becoming the norm. It augments their existing lines which are rated at 245 and 400ka. The plant will have its own power station, which will also come on line next month.
Some people might argue that yesterday’s cartoon simplified the situation in China too much. The problems that today’s leaders face have at least in part been caused by the decisions of previous leaders, and anyway, the problems faced today are more grim.
If that’s how you feel, then you might like this view of the situation facing Xi Jinping today…
But if you think that Xi Jinping is showing greater empathy towards his people, perhaps this cartoon will put that in perspective…
There has been a lot of press lately about credit squeezes, non-performing loans, shadow banking and the impact of all these on China’s economic growth.
Here’s another way of looking at the current “crises”….
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