Chinese Cutbacks Could Signal Higher Aluminum Prices

 |  Includes: ALUM
by: MetalMiner

By Stuart Burns

Global aluminum output has been steadily rising since the start of the year, supported mainly by Chinese and Middle East/Gulf growth with the market in a net surplus of 221,300 metric tons, according to the World Bureau of Metal Statistics.

Long-awaited production cutbacks in China failed to materialize in the early summer and, if anything, growth continued, with China producing some 41 percent of global production by the middle of this year. However, a Reuters article reports aluminum producers in China’s Guangxi province will start cutting production in September due to power shortages there, a move that is expected to support prices in the fourth quarter, the news service says.

Around 15 percent, or over 120,000 tons per year, of Guangxi’s 810,000-ton annual production capacity of aluminum may be affected by the power shortages, and although equivalent to only 4 percent of China’s total production capacity, the cuts would be enough to push the country’s demand and supply from a slight surplus to equilibrium, a local analyst is quoted as saying.

Apparently the southern area grid is facing a deficit of 10 percent in power demand, due in part to a drop in hydro power production. The grid also supplies Guizhou and Yunnan provinces, both of which produce about 1 million tons per year each. We have been advised by some China specialists that smelters generally have captive power agreements or facilities which make them unlikely to be impacted by wider grid shortages, but the drop in production last month suggests the smelters are more vulnerable than reported.

The WBMS estimated China was a net exporter of 185,000 tons in the first half of this year. That figure could easily be reversed with current closures and it’s entirely possible we will see the country swing into net imports, particularly at current market prices which are not favorable for the highest quartile of Chinese aluminum producers. Rusal has just posted a much lower set of numbers for the second quarter, blaming raw materials, power and labor as all contributing to a 70 percent collapse in profits. Prices were high in the second quarter, which suggests power costs are even beginning to seriously impact one of the historically lowest cost producers outside of the Gulf region. Rusal is hoping for higher prices by year end to counter its rising cost base.

Meanwhile, traders, banks and hedge funds continue to buy and store physical metal in long-term financing deals, a trend that is likely to continue with low interest rates and traders such as Glencore earning off both the forward price curve and the cost of warehousing now that they own the storage companies. Leading analysts such as Harbor Aluminum predict prices could be back up above $2,500 per ton by year-end and suggest now is a good time to be buying forward. Recent firmness taking the price back above $2,400 per ton has more to do with dollar strength than the effects of Chinese production cuts, but eventually these will filter through and impact the market, particularly if the closures spread to other regions.