Aluminium prices and the premiums to be paid for taking ready delivery are stuck at levels that would render operation of nearly half the global smelting capacity a loss-making proposition. Bad times for aluminium have started looking like an odyssey without end. Outlook for aluminium and other metals should be seen in the context of International Monetary Fund managing director Christine Lagarde saying global economic growth will be disappointing this year and the outlook for the medium-term has deteriorated. The prospect of rising interest rates in the US and economic slowdown in China, according to Lagarde, will continue to feed uncertainty and higher risk of economic vulnerability. Despite repeated interest rate cuts and other stimuli, the Chinese gross domestic product growth in 2015 was the lowest in six years. Then on January 7, Beijing allowed the biggest fall in renminbi that sent global markets in a tailspin. The continuous slowing of factory activity in China and setback in exports of manufactured items because of poor global demand are weighing on its aluminium smelters to sell whatever metal they can in the global market ignoring all the scrutinies this invites from India to the European Union to the US.
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The Caixin/Markit China Manufacturing Purchasing Managers' Index contracted for the 10th straight month in December 2015 at 48.2, well below the 50-point mark standing for expansion on a monthly basis. While this private survey relates to small and medium firms, the official one which looks at big state enterprises also stayed below 50-point. The two surveys are pointers to the squeeze in domestic demand for all metals. But, in defiance of all economic reasoning, China's aluminium production reportedly climbed 8.77 per cent to 31 million tonnes (mt) in 2015 on the back of a heftier 14 per cent rise to 28.3 mt the year before. Some leading producers in the US, Canada, Brazil and Europe have, however, remained engaged in shaving capacity and production since 2012 in the hope of arresting falls in aluminium prices. But, mothballing of smelters by the likes of Rusal, Alcoa and Hydro had not had the desired impact on prices because of production and export rises in China.
What is also hurting market sentiment is China remains engaged in building new smelting capacity taking advantage of availability of cheap power in north and northwest, thanks to munificence of provincial governments. It is easy to estimate the benefits coming to smelters from subsidised power since in aluminium production cost, electricity alone has a share of up to 40 per cent. Besides, the open and hidden subsidies make it easier for the Chinese industry to leave rising volumes of metal in the world market; it also indulges in faking primary aluminium into semi-finished items on a large scale to claim value added tax rebate that almost fully offsets export tax.
Experience here and in other markets targeted by Chinese exporters is, much of what comes as semis is melted down and re-fabricated by importers. Industry experts say the growing domestic surplus will continue to put pressure on the Chinese aluminium makers to go to any length such as disguising primary metal into semis for export. Producers in India then can hope to get protection from import invasion only by way of suitable recalibration of customs duty. Indian producers have watched their share of local aluminium market shrinking as Chinese global exports surged 18 per cent in the first ten months of 2015 from a year earlier. It's double whammy for us. Domestic market loss to imports has combined with three-month aluminium trading significantly below $1,500 a tonne. Steep falls of their share prices from the 52-week high are a statement of distresses of the two listed aluminium makers.
Overcapacity in China leading to climbing exports cannot but cap prices on the upside over a long time. It is not that China is not shedding any smelting capacity as is happening with the industry elsewhere. After all, the country has a good number of old zombie smelters whose survival is underwritten by subsidies. China claims to have shuttered nearly 5 mt smelting capacity in 2015 out of a total 42 mt. Last year, the country added new capacity of 5 mt; this year, yet another 7 mt capacity is to be built. What is somewhat reassuring are loose assurances from China Non-ferrous Metals Industry Association that for at least one year, the country will not add any new capacity. Neither will any recently closed capacity be revived.
