 "More capacity resting is key to shoring up aluminium prices")
Aluminium prices that peaked in 2011 have since retreated by over a third. This year, the three-month aluminium rates on London Metal Exchange (LME) have fallen over 10 per cent to $1,857 a tonne. The price fall of close to five per cent on the Shanghai Futures Exchange (SHFE) is comparatively modest. Because of Chinese predominance, both as a producer and a consumer of aluminium and its set of controls, the market there has its own dynamics. At the current SHFE of around 14,690 renminbi ($2,399.70), consulting firm CRU estimates that nearly a third of Chinese aluminium producers are losing money. In response to bad times China has already rested one million tonnes (mt) aluminium capacity. But this is not enough of production discipline to shore up the market. China watchers expect further capacity decommissioning by the world's largest aluminium producer in case SHFE prices fall below 14,000 renminbi.
Notwithstanding whatever capacity has been rested, China's net production continues to rise, thanks to building of new smelting capacity in the country's northwest. The region being particularly rich in coal resources, aluminium producers are encouraged to build new smelting capacity in provinces there to take advantage of low-cost, coal-fired power. For a smelter, power alone accounts for 25 to 35 per cent of production cost, depending on energy base and also whether it is captive or grid power. What, however, is not understandable is, why at this stage of capacity overhang, both in and outside China, Beijing should still be offering tax incentives to new smelters, albeit selectively. A CRU report says, "Approximately 1.5 mt capacity is in the process of being ramped up in Shanxi, Qinghai and Shandong provinces in the first half of this year, with about 700,000 tonnes already completed. We estimate that one mt capacity will begin ramping up in the second half in Chongqing, Gansu, Inner Mongolia and Xinjiang provinces." At the same time, many grid-powered smelters in Henan, Guangxi and Yunan provinces are slipping deeper into the red at current aluminium prices. Their operational unviability, if continued for a while longer, will see quite a few going off production. It is commonly expected that another at least 300,000 tonnes Chinese capacity will stop operations before the year-end.
Capacity overhang and surplus production besides, what also has a bearish bearing on the market is bloated LME inventory of over 5.20 mt. An official of Russian aluminium producer Rusal says up to 70 per cent of the white metal stored at LME warehouses are marked for financial transactions. He does not foresee the possibility of reduction in LME stockpiles before 2014. How much aluminium capacity outside China is rendered unviable remains a debatable subject. A CRU official, however, puts it at 4.6 mt. Much more non-China capacity would have bled had not physical aluminium premiums stayed in the range of $260 to $290 a tonne. A Barclays paper says world aluminium production this year will climb to 50.8 mt. This will then be 1.2 mt in excess of demand. While premiums are coming to the rescue of smelters, the fact remains reliance on these "makes the industry incredibly vulnerable." After all, premiums will stay high as long as financing deals find favour with funds and speculators.
The industry will get back into shape only if aluminium prices claw back to $2,200 to $2,300 a tonne. That will, however, call for a much tighter production discipline both within and outside China. Rusal says the market is crying for industry leaders to cut production by 10 per cent. Between Rusal and Alcoa of the US, one mt capacity is to be rested. But for the market to regain equilibrium, another at least two mt capacity needs to be shut down. Closing and then restarting a smelter is an expensive exercise. This, in fact, is standing in the way of many loss-making smelters from stopping production.
Notwithstanding whatever capacity has been rested, China's net production continues to rise, thanks to building of new smelting capacity in the country's northwest. The region being particularly rich in coal resources, aluminium producers are encouraged to build new smelting capacity in provinces there to take advantage of low-cost, coal-fired power. For a smelter, power alone accounts for 25 to 35 per cent of production cost, depending on energy base and also whether it is captive or grid power. What, however, is not understandable is, why at this stage of capacity overhang, both in and outside China, Beijing should still be offering tax incentives to new smelters, albeit selectively. A CRU report says, "Approximately 1.5 mt capacity is in the process of being ramped up in Shanxi, Qinghai and Shandong provinces in the first half of this year, with about 700,000 tonnes already completed. We estimate that one mt capacity will begin ramping up in the second half in Chongqing, Gansu, Inner Mongolia and Xinjiang provinces." At the same time, many grid-powered smelters in Henan, Guangxi and Yunan provinces are slipping deeper into the red at current aluminium prices. Their operational unviability, if continued for a while longer, will see quite a few going off production. It is commonly expected that another at least 300,000 tonnes Chinese capacity will stop operations before the year-end.
Capacity overhang and surplus production besides, what also has a bearish bearing on the market is bloated LME inventory of over 5.20 mt. An official of Russian aluminium producer Rusal says up to 70 per cent of the white metal stored at LME warehouses are marked for financial transactions. He does not foresee the possibility of reduction in LME stockpiles before 2014. How much aluminium capacity outside China is rendered unviable remains a debatable subject. A CRU official, however, puts it at 4.6 mt. Much more non-China capacity would have bled had not physical aluminium premiums stayed in the range of $260 to $290 a tonne. A Barclays paper says world aluminium production this year will climb to 50.8 mt. This will then be 1.2 mt in excess of demand. While premiums are coming to the rescue of smelters, the fact remains reliance on these "makes the industry incredibly vulnerable." After all, premiums will stay high as long as financing deals find favour with funds and speculators.
The industry will get back into shape only if aluminium prices claw back to $2,200 to $2,300 a tonne. That will, however, call for a much tighter production discipline both within and outside China. Rusal says the market is crying for industry leaders to cut production by 10 per cent. Between Rusal and Alcoa of the US, one mt capacity is to be rested. But for the market to regain equilibrium, another at least two mt capacity needs to be shut down. Closing and then restarting a smelter is an expensive exercise. This, in fact, is standing in the way of many loss-making smelters from stopping production.