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All-in aluminium prices stand for London Metal Exchange (LME) rates plus regional ingot premiums for taking delivery. Such prices fell quite rapidly so far this year, as China raised its exports of primary aluminium, alloys and semi-finished products by 40 per cent to 1.65 million tonnes (mt) in the first four months of 2015 from a year earlier.
India is a net exporter of bendy metal aluminium, what with large new capacities getting commissioned in the face of nil-demand growth. Chinese export surge is hitting Indian aluminium producers hard in two ways. First, income from export of per metal unit is down. Second, domestic aluminium prices being linked to LME rates the bearish impact of China unloading its surplus in the world market is acutely felt by our producers. Mind you, China has more than half the share of world production and consumption of aluminium.
But with smelting capacity of over 36 mt, the country has room for producing more aluminium than over 28 mt it did in 2014. The reality is with slowing down of the economy, the Chinese aluminium demand growth in this year's first quarter could only be 5.9 per cent on year-on-year basis. Naturally, the country's aluminium industry has come under increasing pressure to export, to rid itself of surplus.
High levels of Chinese exports are a given, if the country's aluminium production remains at an annualised level of over 30 mt in the current second quarter like in the first. According to China National Bureau of Statistics, the country made 2.6 mt of aluminium in April. At the same time, price arbitrage working in favour of Shanghai Futures Exchange (SHFE) over all-in LME rates is an extra incentive for China selling large quantities of aluminium in the world market.
But more the Chinese exports, bigger will be the fall in premiums shrinking arbitrage scope. The world aluminium market is, therefore, on the cusp of convergence. In the beginning of 2015, market intelligence agencies did forecast aluminium deficit of up to 1.5 mt outside China. In case China ends up exporting about five mt this year, as chief executive officer of the world's largest aluminium maker United Co, Rusal Vladislav Soloviev, is anticipating, ex-China expected deficit will turn into a surplus.
Thanks to varying regional premiums, aluminium prices are not identical in all places. Like, while all-in price in Europe was down 23 per cent in the past six months, price fall in the US Midwest was 18 per cent. But the market will still be finding the bottom in case China's exports match Rusal forecast. In a recent report, Goldman Sachs, which is foreseeing some surplus, says the three-month LME average price for the current year will be $1,800 a tonne.
The investment banker says "a decline in prices this year won't be enough to balance the global market and China cannot be relied on to restrain output". It is not that China has not seen any idling of capacity. In the first quarter, capacity closures were around 250,000 tonnes. Mercifully, poor smelter profitability is standing in the way of China making more use of capacity. Shutting capacity, whether of aluminium or steel, remains a vexed issue in China. If the social cost of shutting a smelter is found to be higher than losses suffered by it, then the management, in all likelihood, will be told by provincial bureaucrats to avoid plant closure.
The reality in the world's largest production centre being such, balance in the global aluminium market will depend on ex-China capacity resting. Rusal is likely to idle 200,000 tonne smelter capacity this year on top of 800,000 tonne capacity rested in past two years. As Goldman says, expect further production cuts across regions outside China in case all-in prices sink below $1,875 a tonne.
Research agency CRU is, however, foreseeing aluminium production rise through this year despite the announced closure of Alcoa-BHP Billiton's Sao Luis plant in Brazil and likely delays in commissioning of Rio Tinto's 420,000 tonne Kitimat smelter in Canada. In CRU's global production estimate, India figures prominently where two Hindalco smelters Mahan and Aditya and Balco's new potline at Korba are being ramped up.
As for Vedanta's plan to "start up over 600,000 tonne capacity at its long-term idled plant" at Jharsuguda in Odisha following its receiving permission to use electricity generated under a separate group company for use by the smelter, CRU remains "cautious" about "ramp up" possibility due to "past difficulties" in this regard.
TAKING CUES FROM THE DRAGON
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China raised its exports of primary aluminium, alloys and semi-finished products by 40 per cent to 1.65 million tonnes in the first four months of 2015 from a year earlier
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This led to a rapid fall in the all-in aluminium prices, so far this year
