Last week we asked the question, what is the biggest sized smelter you can imagine, and what would the limiting factor be? (See here for that post.)

The question was put in response to an announcement about a new smelter being built in China. We offered a small prize to the first 5 people who could guess the size of the new smelter.

Nobody guessed the size, but we got several comments via email and via Linkedin and on the blog.

So we are awarding a voucher for US$100 off the cost of entry to the AZ China Aluminium and Carbon Conference to the following people:

• Gordon - who suggested that emissions licences would be the limiting factor.
• Julien - who suggested that electricity supply would be the limiting factor.
• Edgar, Ron, Hira, and Ashis all contributed answers via Linkedin, where the prevailing view was that market forces would be the most important factor. Concentrating corporate risk in one plant also got a mention.

These six people all win the voucher. We will contact the winners directly.

For the record, we don’t know what the limiting factor would finally be, but we do know that a Chinese aluminium company is planning to build a smelter in Inner Mongolia (home to vast quantities of coal) that will eventually be 3 million tonnes on one site. Xinjiang Xinfa is planning to continue expanding their smelter to 2.4 million tonnes. There are several other Chinese companies looking at total single site capacity at 2 million tonnes or larger. Shandong’s Hongqiao group doesn’t qualify for this race, as their 2.7 million tonnes of capacity is spread across 5 sites, though they all are within a short distance of each other.

There are increasing indications that Premier Li Keqiang may have blinked.

Despite the rhetoric of the last several months, that the government in China would not cave in and stimulate the economy, there are signs that a “Claytons” stimulus is in place. Australians will understand this phrase - it comes from a non-alcoholic beverage that was marketed as the beer you have when you are not having a beer. And this seems to be the stimulus we are having when we are not having a stimulus.

The Chinese magazine Caijing has reported that a meeting took place in Beijing a few weeks ago, to discuss the current economic situation and determine the tone of macroeconomic policies for the second half of the year. One day after that meeting, the State Council executive meeting deployed its municipal infrastructure construction plan, covering items from urban underground pipe network construction and transformation, to sewage and garbage disposal and recycling facilities, as well as subway, light rail and other public transport system construction. There was a special focus on light rail with an increase in the number of projects, especially in mid-Western provinces, and a boost to the capital investment.

The Caijing article also says that reform of taxation, finance and energy will be a top priority, in an effort to underpin the stimulus program with more social and market orientation. The 2008 RMB4 trillion package created many problems in the Chinese economy, largely due to its capital intensive nature, according to the article.

This is but one of many signs that perhaps there has been a quiet change of sentiment, although to be fair, there are others who argue that economic bureaucrats are preparing for GDP growth rates below 7%.

But don’t look at indicators such as iron ore prices or steel industry activity as a sign that things are turning. Iron ore prices are relatively high at the moment, driven by the cyclic de-stocking/re-stocking program that drives that market, while steel companies are in many cases running in deep negative territory. Any sign that steel production is falling could be more to do with steel companies going bust, while an increase in steel output may be more to do with job preservation.

It is probably still too early to tell, and we may not know until we get to the end of the year. That’s when we can look back and see what really happened - lagging indicators are good for hindsight, even if not much use for foresight.

Meantime, the Communist Party has announced that its next plenary meeting will take place in November. That’s when those reforms of taxation, finance and energy, as well as the one-child policy, Hukou reform and other measures are likely to get an airing. But even then, such changes are not likely to have any immediate impact.

Perhaps Li Keqiang has blinked, and agreed to loosen the reins a little, and very quietly, but it’s unlikely we will see any serious signs of a recovery for some several months yet.

The official figures for July’s production of primary aluminium in China have now been released, and show that China produced 1.84 million tonnes for the month.

This represents a daily production rate of 59,300 tonnes. Although that is 10% higher than July 2012, importantly, it is also some 2,000 tonnes per day lower than June 2013.

It’s funny how people raced to announce that the June number was 4,000 tonnes per day higher than the May rate, yet nobody in the reports I have seen have reported this apparent reversal in July. Aluminium production is not like a widgets factory, where you can turn production on and off with a spigot. It is simply not possible, even in China, to suddenly increase output and just as suddenly reduce it again (although, technically you can reduce output suddenly by turning off all the electricity.) But as we have reported many times in the past, people blindly accept the official figures as if they were true.

I might be sounding a little peeved and twisted about this, but we have been having this argument since at least 2010. I remember my friend Jorge (hi Jorge if you are reading), he said you can’t trust street talk. But this is China, and the official numbers are less reliable that even street talk. Now even the International Aluminium Institute has finally acknowledged that there is such a thing as “unreported production - China”. They reported 2.4 million tonnes in this category for 2012 - which is actually too high.

As if it isn’t hard enough to maintain a healthy profit in the calcining business, this week’s news from Alcoa that they will close their Brazil smelting capacity only adds to the woes.

Calcining companies are already grappling with the impact of shale oil on the supply and quality of green coke, and are pondering how to deal with the proliferation of new capacity being constructed in China and elsewhere. The Brazil cuts will cost only about 60,000t of calcined coke sales, but that’s on top of all the other capacity cuts announced in the aluminium world.

I understand that Alcoa Brazil was being supplied by the local company Petrocoque and by BP, from their West Coast USA facility. BP will look to place their portion into their existing market, but Petrocoque finds themselves stranded. They will need to find new markets, which is the same as saying they will have to attack the markets currently supplied by the likes of Rain CII, Oxbow and BP.

Any action to claim market share now needs to be measured in light of the growth of new capacity, but more importantly, calciners will need to be protected against any further smelter cuts. Rusal has announced more cuts, Alcoa still has another 200kt to announce, and Rio Tinto Alcan has yet to show any clear direction on their plans for capacity reductions. Further, BHP Billiton has made no secret of their plans for their primary metal production in South Africa, so there may be more cuts to come from a number of places.

All calcining eyes are no doubt turned towards the Middle East. But even there, the opportunities to win business are limited. Mubadala is now fully covered via ZCGG and Sinoway Carbon, while Alba has its own calciner. Although the Gasan calciner seems to be dead now, there are still a couple of other projects in the wings, that could make it very difficult for calcining companies based in the USA or even in China or India, to make inroads.

At least coke prices are reasonably low, though the chances of increasing margin are still very low. We heard of one transaction that took place this month, where CPC was sold to a large smelter company at a price of around $320. There were special circumstances about this sale, but it still rates as a low price target for other smelters to reduce price. Who would be a calcining company?

AZ China’s latest Aluminium Monthly Handbook, July 2013, covers global commodities and economies with a focus on the aluminium market and China.

Click the link to download the report. For an annual subscription to this report, email enquiries@az-china.com

Subscribers to our BDM report, which tracks the details of closed and new capacity in China, may have noticed the increase to New Capacity in July due to almost 400kt of restarts.

Operating Capacity is holding steady at close to 24Mt, but the real number to watch is China’s Potential Capacity amount. The number of under construction and idled plants is astonishing compared to total operating capacity. Were the market to improve to just above cash costs for the idled plants included in our calculations, almost half of this huge potential capacity number could come back on stream in a heartbeat, ruining the industry’s efforts to reduce overcapacity.

Although the pipeline of new smelters under construction has not had any new additions recently, there is still more than 5 million tonnes being built but not due for completion until 2014 or later. In fact, the pipeline of new projects stretches out to 2016, with several “phase 2″ potlines due to be added the lines that have been completed or are being started this year.

For more details, contact us: enquiries@az-china.com