Chalco starts work on 600KA smelter

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Another 600KA smelter will be appearing on the world stage in the next couple of years. Chalco has started foundation work for their new smelter, in Qinghai province.

The new smelter will be integrated with a coal production and power station facility. Apparently it will cost in the order of RMB 10 billion, or about US$1.5 billion. No word yet on the capacity or the expected start-up date, but we estimate it will be in 2014.

We understand that this smelter will also be something of a test or pilot plant, perhaps similar to RTA’s 600KA plant in Canada.

 

Who to believe?

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Or is it whom?

This afternoon, within an hour of each other, two aluminium reports landed on my desk.

One was from Goldman Sachs, in which they foresaw a 3-month price of US$2200 or more, and recommended a long position. Improved demand in the next few months, combined with the inability for smelters to respond to that uptick in a timely fashion, should see the metal price motor past their own long position of $2150 - according to them.

An hour later, Reuters released their Q3 forecast, prepared on a highly technical basis by Wang Tao. Mr Wang predicted a metal price of $1505, which he based on the auto Fibonacci Retracement line of 61.8% (I told you it was technical.) Furthermore, should the wave pattern continue, the price could descend to depths below $1000 - according to Mr Wang.

As usual, the truth probably lies somewhere between those two points. Should the metal price retreat below $1500, smelters would quickly pull out the circuit breakers and the mothballs. (Although that price would also open a huge arbitrage window with China - assuming China’s price doesn’t follow the LME down.)

As for the upside, it isn’t clear that demand has really strengthened all that much, and in any case, there is enough marginal metal capacity that could come on stream quickly, or is set to come into the market in any case. One such example is the RTA smelter at Alma in Quebec, where it seems the unions and management may have finally found common ground for an agreement.

We may be a touch biased, but here at AZ China, we recommend turning to the AZ China Red Book for the best information and analysis on what is really happening in the aluminium sector, especially here in China, the world’s biggest producer and consumer.

 

 

Worth 1000 words…

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We at AZ China are blessed with not just one, but two budding graphic artists. So what better way to tell the story of what is going on in our world than with pictures.

Here is one from Alex, and it captures the situation well. It seems that some people think that the antidote for a falling LME price is to shift the blame onto China.

We hope you enjoy this and future efforts from our team.

What are the odds?

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Those of you who were at our Qing Dao conference will remember Professor Patrick Chovanec’s excellent paper on the leadership transition that is due to occur here in China in the next few months. Communist Party leaders retire in October, then relinquish their Government positions in March next year.

Now here’s an interesting, if slightly unacademic piece on the relative position of each of the contenders for the 25-man politburo and the 9-man Standing Committee, along with their “bookmakers odds” of winning a seat.

https://sinostand.com/2012/07/02/politburo-possibilities-the-contenders-for-chinas-new-generation-of-leaders/

It’s the sort of piece that gets blogs banned in China. Bloomberg ran an excellent article last week showing that Presidential favorite Xi Jinping’s family was worth hundreds of millions. Despite Bloomberg going to great pains to make clear that no wrong-doing was suggested, Bloomberg’s website was blocked. Hopefully the same won’t happen to us in re-presenting this item for you.

Get set for coke price rise

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Word on the street is that pet coke prices are set to rise by the end of July.

It works like this: The world economy remains sluggish, and threats of military activity have waned. That has led crude oil prices down sufficiently to trigger the domestic China gasoline formula.

The formula sets the price for gas for consumers by taking the average crude oil price for the previous 3 weeks. If it has moved by more than a fixed percentage, then the government moves the gasoline price. The recent price history puts the average well below the downside trigger point, meaning that when the 3 weeks is up, mid next week, the gas price will come down.

But the oil companies here aren’t so enamoured of the national interest. Since their margins will fall as a result of the trigger, they have already decided to slash refining output in response. A drop in refining output means less residual oil going to the cokers, less coke, and hey presto a reason to raise coke prices.

The word is that the rise will be in the order of RMB200 per tonne. You will probably see the rise starting in about 2 - 3 weeks time.

While this is bad news for countries and companies buying their anode grade coke from China, it will be good news for those who have been importing US fuel grade coke into China. We understand that port-based warehouses are bursting at the seams with coke that can’t be sold. Although US coke prices are low and have remained so for some months, the China domestic coal price has also slowed, giving fuel buyers a choice of coal or coke.

 

Reprieve for Point Henry

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Word has come through that Alcoa’s Point Henry smelter will get a reprieve for 2 years.

A combined package from the Victorian and Australian governments will inject AU$40 million into the plant. According to a report in the local press, the money will be used for plant upgrades, “staff development” and energy efficiency projects.

But 60 to 65 jobs will go, and Alcoa must operate the plant at the same levels as currently, or risk repaying the government. There was no word on what would happen after the 2 years expires. Presumably there is a view that metal prices would be back up above $2200 - $2400. Point Henry would need that sort of level from the LME for it to be profitable.

Taking the plant capacity of 220,000 tonnes, and splitting the $40 million over 2 years, it represents a reduction in operating costs of about $90 per tonne. With the LME sitting around $1850 (3M), it means there is still a significant distance to get to black ink. Various estimates that we have seen put Point Henry’s operating costs at about $2400. Of course climbing premiums help cover some of that gap, but it certainly seems as if Alcoa has had to at least match the Government package.

It is certainly good news for the local community (declaration of bias - I grew up in that town and worked at Point Henry almost 14 years). Outside the public service, Alcoa is probably the largest employer in the nearby city of Geelong, which has had 2 decades of bad news - financial disasters, manufacturing industry decimated.

The government rescue package pales into insignificance however, when compared to the Henan Government’s rescue package here in China. That package has a price tag of up to US$330 million for 7 months, and protects probably 3,000 jobs, compared to about 540 in Australia, as we discussed in a recent post.

China’s largest single-site smelters

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Over on Linkedin, there has been some discussion about which smelter is the largest in the world. Apparently EMAL is claiming that they will take that title when their expansion finishes next year. They will go to 1.3 million tonnes at that time.

For the record, here are the largest single site smelters in China:

1. East Hope - Inner Mongolia province, 880kt
2. Xinfa - Xinjiang province, 800kt
3. CPIC Huanghe - Qinghai province, 555kt
4. Shenhuo Yongzhou - Henan province, 520kt
5. Nanshan Yantai - Shandong province, 450kt.
Shandong Weiqiao has 4 plants all very close to each other, but not behind a single fence, so they don’t qualify for this list, even though together they add up to 1.8 million tonnes. (There’s a gap of about 28 kilometres between them.)

This list will go out of date next year, when Xinfa’s smelter in Xinjiang adds another 600kt, taking them to 1.4 million tonnes in a single site. Then in 2014, it will go out of date again when Shenhuo’s 1.8 million tonne plant is completed. But Xinfa will have the last laugh, though perhaps not until 2015 or 2016, when they finish their expansion with an additional 1 million tonnes, taking them to 2.4 million tonnes - in a single site.

Henan power price subsidy - more info

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It has now been revealed that only 5 companies in Henan province will receive the RMB0.08/kwh subsidy from the provincial government.

Those 5 are Chalco, Yichuan, Shenhuo, Wanji and Yulian. But together they account for about 3.6 million tonnes of capacity.

The subsidy will be available for the 7 months from June 1 to the end of the year, with a metal trigger price of RMB18000. Since the aluminium price is hardly likely to get anywhere near that trigger, it means that these 5 companies have a benefit of about RMB1,100 per tonne of metal produced.

In that scenario, it is quite possible that some or all of the idle capacity belonging to these companies could also get restarted. If that happens and all 5 companies run to 100% capacity, then the provincial government will be up for RMB0.3 billion per month. That’s about US$48 million, or a total bill for the 7 months of about US$330 million.

It’s unlikely that all idle capacity will be dusted off for a 7-month window, but the ratios of investment in the subsidy hold true.

Now here’s the rub. If we assume a workforce for the full capacity of somewhere around 6,000 direct workers, and indirect jobs (everybody from maintenance companies and consumables suppliers to the local “jiao zi” or “chuan’r” maker) at a ratio of 5 indirect jobs for every direct one, then we can work out the government’s investment per job.

And that calculation is sobering. If we assume 33,000 (direct and indirect, I picked this number to make the division easier) jobs are protected by this move, then the government is spending US$10,000 per person over the seven months. In that same period, the average income for a Chinese worker is likely to be about RMB3000 per month, about US$480, or US$3,400 for the 7 months. There’s a lot of assumptions and averages in these numbers, but any way you look at it, the Government is spending 3 times the average salary, just to protect these jobs.

Anyone doubting that the government is very nervous in the run-up to the once-in-a-decade leadership change, can now dispel those doubts.

 

 

Henan power price cuts - a case of hello/goodbye

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Shanghai’s aluminium price has reacted exactly as we predicted. Following the Reuters story on Tuesday that Henan Provincial Government had agreed to a RMN0.08/KWH electricity price cut, the spot price of aluminium has dropped RMB300. (See the previous post for more on this.)

The light metal is now down to RMB15,200 spot, dangerously close to the trigger point for other plants to reconsider their future.

Trouble is, the Henan Government may now have opened a can of worms. plants who previously might have brought out the circuit breakers at the RMB15,000 point, will now instead travel to their local provincial government office with a copy of the Reuters article (in Chinese of course), seeking their own rescue package.

And for those smelters that were the beneficiary of the Henan government largesse, they must be wishing it never got into the public domain. The RMB1,100 per tonne benefit they enjoyed two days ago has now been discounted by one third. A case of hello savings, goodbye savings.

 

Henan makes cuts - to power price

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A report just in from Reuters says that the provincial government of Henan province, the traditional home of China’s aluminium industry, in central China, has announced reductions of RMB0.08 per KWH to the power tariff for that province’s aluminium smelters.

According to Reuters’ sources, that will provide assistance of about RMB1000 per tonne of metal. Reuters has no other information on the story.

AZ China’s own analysis of the Cash Cost Curve shows that smelters in Henan province would be better off by RMB1,110, taking into account all the plants in that province.

In our recently published “AZ China Red Book”, we predicted that this tariff cut would come. Our view was that this would help shift Henan smelters towards and into the third quartile, and onto or slightly above the current metal price.

Theoretically at least. The unfortunate thing for the smelters who think that they have gained some relief from this move by the government, is that the market will likely eat the gain very quickly. This has already been shown - initial subsidies to a handful of plants over the last few weeks has resulted in the SHFE price slipping.

This announcement also tests the hopes of some corporations outside China that they will be able to eventually sell large quantities of metal to the Chinese market. Tariff cuts are designed to protect jobs, but they also keep the supply side of the market more liquid than needed. The price will drop, the arb window will close, and China will once again be blamed for the over-supply situation in the rest of the world.

And that’s the other unfortunate and unintended consequence. By protecting local jobs, the Henan government is effectively forcing other smelter groups outside China to go back to their fleets with a magnifying glass and a razor blade. Jobs saved in China will cost jobs elsewhere in the world.

By the way, with almost 3 million tonnes per year production in that province, and at RMB1100 per tonne, that works out to RMB3.1 billion in lost revenue for the province, or about US$500 million, on an annualised basis.