Monthly Archives: December 2013
This simple chart tells the story of the China aluminium market the last 6 months. 
The second half of the year has killed off the forward curve, and sent the market into depression. Mid-year, the market was boosted by the idea that perhaps the idled capacity that had just been announced would leave the market short by the middle of 2014. The market expected prices to reduce slightly, but find some strength after Chinese New Year, probably in expectation that the new Government’s policies for the economy would have kicked in by then.
Now as we say goodbye to 2013, the market’s mood is quite a lot more sombre. Not only has the spot price failed to hold, but the forward curve has lost its strength. With 4 million tonnes of new capacity set to enter the market in the next 12 months, the price “curve” (it is not much of a curve any more) indicates that the market sees no bright future ahead. This is despite several pronouncements in the last couple of months from various government departments in Beijing, each with new rules, regulations and orders to dampen over-supply. As one producer said to us, the aluminium industry has pretty much given up on listening to what Beijing had to say.
Not that a low price is a bad thing. From a Communist Party perspective, a depressed metal price gives fabricators a lower input cost. And fabrication is where the employment is. From the party’s point of view, low input costs are good for urbanisation, and for the roll out of national grid, and helps in the fight to prevent inflation from rising. Indeed, there is a school of thought that says that the government protestations about over-capacity are not meant to be taken too seriously. Those bureaucrats have to write those rules and say those things, don’t they? It’s their job to write them, though not to enforce them.
2013 is coming to an end and we will soon welcome 2014. We’d like to thank all of our clients for your support and wish all of you and your family a happy New Year!
More than half a year has passed since we officially launched the AZ China Calcined Petroleum Coke (CPC) Index and we are excited to see many of you are interested in contributing. CPC plays an important role in making primary aluminium, which roughly accounts for 10% of the total cash cost of production. However, different from other essential raw materials like alumina, there is no clear pricing methodology for CPC such as linking to the LME aluminium price. And within a depressed aluminium market environment, the room for adjusting power and alumina costs (the two major costs in making aluminium) as well as other raw materials such as CPC is limited. Real time market intelligence is critical for both CPC producers and consumers to negotiate fair deals.
The AZ China CPC Index (CPCX) is made up of actual transaction data. The Index requires both the seller and the buyer to add their transaction data into the index system and index program will then automatically confirm that both sets of data match. Our intention is to ensure the data is accurate yet still confidential.
The CPCX tracked two countries in 2013 and we hope to add more in 2014. One of the countries, India, saw the average monthly price remain relatively flat throughout the year with some downward pressure due to lack of demand from aluminium. The other country, China, saw the benchmarking price in Shandong and Jiangsu fluctuate drastically. Prices slumped substantially in February and gradually reached a bottom of US$334/t in June. Then prices rebounded and hit the year high US$415/t in August but soon adjusted downward and closed at US$342/t in October. We will notice our CPCX subscribers of future trends and developments in CPC in 2014.
If you are not yet a CPCX subscriber, but are interested in the CPC global market, it takes just 3 minutes to apply for a trial account. Click here to register and please contact richard.lu@az-china.com for questions.
Reuters yesterday published an article saying that China’s National Development and Reform Commission (NDRC) is set to impose new power tariffs on China’s aluminium industry.
Power prices will remain unchanged for smelters that do not use more than 13,700 kilowatts (KWs) for each tonne of aluminium produced, while those that use between 13,700-13,800 KWs will be charged an additional 0.02 yuan per KW, the National Development and Reform Commission (NDRC) said in a statement.
Smelters that consume more than 13,800 KWs of power for each tonne of aluminium produced will be charged an additional 0.08 yuan per KW, the NDRC said.
Plants that exceed the 13,700 KWs/tonne threshold will also be barred from direct negotiations with power companies for lower energy prices. (Acknowledgement to Reuters)
There’s no doubt this announcement, or more correctly the Reuters report about the announcement, will bring out those commentators who will predict further upheaval to the aluminium industry in China. But the problem is, there are some factual holes in the story, and in the edict. More information will be provided to our clients in a Client Briefing Note. If you are currently not a client, contact enquiries@az-china.com.
It appears that high sulphur petcoke imports will be saved from a tariff in 2014. The recent list of 2014 dutiable items published by the Chinese government does not mention high sulphur petcoke.
Readers may remember that in September of this year, there was a lot of speculation that a tariff would be imposed. This was after the government published a list of commodities to be controlled due to their contribution to air pollution. We previously reported on trader’s fears of a tariff here.
With air quality a hot topic all year in China, it was a little surprising that the Government did not follow through on its threat. But it was also a little surprising that high sulphur petcoke imports made it to the list of “bad” items. China had imported 7.2 million tonnes of the material to the end of October, but this is a tiny number compared to the amount of coal and coking coal imported, and much less even than the amount of high sulphur petcoke that China’s own oil refineries produce.
The fact that no tariff has been applied does not mean that high sulphur petcoke importers are off the hook. There could still be other avenues to restricting imports. One obvious solution would be to apply a quota system, limiting the volume of coke imported by forcing importers to apply for a licence. After all, a tariff would only raise government revenue, but would do little to stop imports, which have risen 54% year-on-year.
As 2013 comes to a close, what will the next few years hold for China and the aluminium industry? China is facing structual change and growth will slow compared to previous years. Yet that growth is likely to come less from exports and more from private consumption. The expansion of private consumption-led aluminium use, such as automobiles, consumer goods and packaging, will be an interesting area to watch. Essential infrasture building blocks such as power grids and electrical cables will also see an increase in demand due to government funding of intiatives such as the National Smart Grid program. The service sector in China will also be an area to watch in the next 5 years.
Overall, is our view for the outlook of China’s aluminium industry postive or negative?
Those of you who have purchased our 5 Year Outlook for China’s Aluminium Industry report already know the answer! If you have not yet purchased this 130-page indepth report, contact us today.
The 5 Year Outlook for China’s Aluminium Industry is the most comprehensive work available on the subject. For pricing information and detailed table of contents, email enquiries@az-china.com.
It might seem like a strange headline. After all, Alcoa is making a lot of its net profit from the automotive sector.
But I am not talking about the USA. I am referring to Australia.
In the last week or so, General Motors has announced that it is pulling out of Australian production operations. GM has a couple of plants in Victoria and South Australia, producing the “Holden” line of cars as well as exporting some rebadged models to Europe and the USA.
But the high Australian dollar, combined with a high unit cost of production has made life very difficult for all car manufacturers in Australia. Australian wages are very high, and the market small. The solution for several years now has been for Government subsidies to support the automobile industry.
But Australia has a new conservative government, and the new Prime Minister is talking tough. Tony Abbott was quoted widely in the Australian press recently, saying “no government has ever subsidised its way to prosperity.” The new government even went to the point of harassing GM to make the decision to pull out of the country. As a result, GM walked. They will exit Australia in 2016.
So imagine the plight of the people at Alcoa Australia. Their Pt Henry smelter is now 50 years old, and has been operating for the last 18 months on a subsidy from the previous federal government. That subsidy is due to expire in June. What possible argument can they find to convince Tony Abbott to give a subsidy to them, when he refused to give assistance to a much larger emloyer?
As it is, the subsidy that expires in 6 months is not enough to keep the plant alive. The subsidy amounted to a net cash reduction of about $90 per tonne, but the smelter’s cash costs are around $2200 - $2300, and even if the full Japanese $250 premium is added in (which it can’t, since it covers some real costs), an LME price around $1800 means that Alcoa is still dipping into its own pockets to keep the place alive.
The folks at Alcoa Australia are probably deeply concerned about the events surrounding General Motors. Though the folks in Alcoa’s headquarters in New York probably now know exactly what they will be doing in 6 months time when the subsidy expires.
Even though TMS is a once-per-year event, it is easy to get into the routine of things. Friday, attend the Jacobs coke conference, Saturday corporate team dinners or the Aussie night out, Sunday one of the many special events put on by good folks such as those at Koppers, Sunday night the Jacobs conference, Monday night the BP dinner and so on.
Except that if you are expecting the same again in San Diego in 2 months time, forget it. Jacobs have quietly re-scheduled their TMS reception making it available to “conference attendees and invited guests only”. Previously all you had to do was to register with them for the free nibbles and drinks, and many simply turned up on the night.
Admittedly, it must have cost Jacobs a small fortune to put on the reception, with as many as 600-700 people turning up. Assuming they got say 300 coming from their conference, that leaves them with up to another 400 freeloaders (such as myself).
That leaves open the Sunday night for many people, and a big gap in the TMS experience for a lot of folks. Although many only turned up to the Jacobs event for a quick drink before going to a client dinner, there is now no central meeting point. The Jacobs Sunday night event was often the only opportunity for people to catch up with those with whom we don’t already have a meeting scheduled.
Update - the Jacobs website shows two different dates for the industry reception. The front page summary shows it to be Saturday 15th, but when you go to register or download the agenda, it shows Sunday 16th. The first version of this blog post referred to the Saturday date. We have written to Jacobs pointing out the error.
One area of the aluminium industry that doesn’t get talked about much is, what happens to a dead pot?
In the normal scheme of things, the steel furnace in which pure aluminium is made will last somewhere between 5 and 10 years before the protective linings wear down too far. At that time, the entire shell is lifted out of its position and transported to a special workshop.
It takes a couple of days to let it cool, then another couple of days to jackhammer out what’s left in the shell so that new linings can be installed and the shell put back into the line.
But what exactly is left in a cold dead pot?
There are four main elements. There is some pure aluminium that missed being tapped out of the furnace. There is some steel - the steel bars at the bottom of the pot that act as part of the electrical circuit, and are called collector bars or cathode bars. There is the remainder of the cathode, and the various levels of refractory and protective bricks that go under the cathode.
The pure aluminium can be retrieved and recycled, and a strong magnet will pull out any pieces of steel from what the jackhammers dig up.
But that leaves you with the two worst parts - the brick portion and the carbon portion. The brick portion can be used as road fill, if you can sort it from the carbon portion. But the carbon portion contains some nasty impurities, namely arsenic, cyanide and hydrogen. These two portions, the brick and carbon pieces, are what is called Spent Pot Linings, or SPL.
In Australia, there were a variety of processes for disposing of SPL. One was a method developed by Alcoa that produced aluminium fluoride, but the operating cost and yield made it impractical for commercial use. Another method, which we used at Tomago, was to ship the SPL to a company in Italy, whom we had to pay to take it off our hands. Another way is to let the stockpile build up, in hope of someone finally coming up with a foolproof commercially viable system to treat and dispose of the SPL without upsetting the environment or the environmentalists.
But what do they do in China? They bury it.
If we take a 5-year average of total China aluminium production, and use 2.5 tons per pot per day output, we can roughly estimate the amount of SPL that China produces each year. Let’s assume for this calculation that the average metal production per year has been 20 million tons. That means 55,000t per day, so approximately 22,000 pots in operation at any one time over the last 5 years. If the average life is 5 years, then we can expect that 4,400 pots have been delined and relined per year in that time. Assuming 20t of materials per pot to come out (cathode blocks, refractory materials, collector bars, sidewalls, etc) then that means that China is generating roughly (very roughly) about 88,000t of SPL per year.
Even if I am 50% out in my calculations, that’s still 44,000t of nasty material that’s going into landfill every year.
I don’t want my local water supply getting infected by leached cyanide and arsenic. And I don’t want an explosion happening when the trapped hydrogen reacts. But that’s exactly what is happening in China.
At least in most of the rest of the world, SPL is being treated somewhat responsibly. Nobody wants to make a big deal of it, because it only reminds people of the less environmentally-friendly side of aluminium. It’s up there with the red mud ponds scattered all over the world that come about because of the bauxite-to-alumina process. Provided aluminium companies accept their responsibilities and dispose of their waste correctly, there is no problem.
But China is not part of the rest of the world.
- Chalco officially announced the resignation of its VP, Li Dongguang, who was under investigation for corruption.
- Chalco employees took part-time jobs to make a living.
- Chalco management to cut annual compensation in half unless the company can be turned around.
If you keep an eye on the aluminium industry in China, you must follow the above stories reported recently. You can imagine how tough and painful a year Chalco went through, since employees can only make a living by taking part-time jobs like washing dishes. Also notice the determination of those big bosses in Chalco to turn things around. But the reality is always cruel.
In order to avoid possible delisting, Chalco took lots of measures to regain profit. However, selling unprofitable assets to its parent company is not consistent enough to save Chalco. Comparisons between Chalco and private companies like Weiqiao and Xinfa pervasively circulate within the aluminium industry. It begs the question, why are the differences so huge.
Firstly, it is derived from the structure. Chalco possesses common characteristics of Chinese SOEs. The company is an extremely top-heavy body with a management-staff ratio of about 1:8, according to one industrial analyst. By comparison, the ratio is only about 1:50 in Weiqiao. It’s clear enough that the productivity per capita in Weiqiao is much higher than Chalco. Chalco carries more than 100,000 employees, which is a huge number, even in a low-salary country like China.
Secondly, Chalco relies too much on government bailouts. Chalco sold billions of dollars of assets to its parent company, but what will Chinalco do after taking over those bad assets? The only way to pay the bill is via the government. But in these days where the industry is no longer monopolistic, the returns available to the government are much lower, and they are likely to lose patience with Chinalco and Chalco. Chalco must leverage its unique advantages as an SOE to boost its development. For instance, winning more direct power contracts and developing upward integration by acquiring captive power plants to reduce cash cost.
Thirdly, Chalco made so many mistakes in oversea investment. It’s hard to believe they did any due diligence before they put money into other’s pockets. The most recent example is Chalco’s refining copper project in Peru. It’s said the project cost will be over the budget again. Even though it’s estimated to be profitable based on current status, the final result is still questionable. Will it be another failure, like the equity stake in Rio Tinto?
A piece of good news is that sentiment in the aluminium market is turning bullish gradually. This may offset some pressure on Chalco. But substantial reform must be carried out now.
Let’s see where Chalco will go in 2014.
Although the aluminium market is still soft, some winter stockpiling stimulated related upstream prices.
Due to lower operating rates of fluorspar manufacturers and their low inventory, the fluorspar prices continued to rise since this June. The dealing price of fluorspar (Spec. FC-97A) in the East went up from RMB1,625/t to RMB1,643/t, and in the North from RMB1,590/t to RMB1,690/t by November end. In the last Black China Report, we predicted the price of fluorspar would go up in December.
Within the last week, domestic fluorspar prices were in the range of RMB1,650/t to RMB1,800/t.
From now on, we are going to publish regular fluorspar prices in our Weekly Carbon Report, on a separate page, in order to help you understand and track the domestic fluorspar market timely. Thanks to those of you who asked us to bring this information to you - we value the feedback.
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