Experts are expecting the other shoe to fall after suspending the construction of two million metric tons per annum in aluminium smelting capacity in China’s far west. The closure of smelters run by Xinjiang East Hope Ferrous Metals Co. Ltd., Xinjiang Qiya Energy Aluminium Electric Co. Ltd., and Xinjiang Jiarun Resources Co. Ltd. on April 14 have led market watchers to believe that such curtailments may be only the tip of the iceberg. On April 20, the same government ordered Jiarun to stop another 200 kt worth of illegal current capacity. Should this policy be strictly followed elsewhere, a full-scale audit intending to clean up the aluminium sector would have wide effects on China’s aluminium production and world aluminium prices.
According to insiders, the next target for closures are smelters in China’s heavily industrialized provinces of Shandong and Inner Mongolia. Of China’s total illegal aluminium capacity (which, according to some sources, is between 3.7 million metric tons and 6.6 million metric tons) the vast majority of it (up to 4.3 million metric tons) is situated in Shandong. In addition, aluminium firms operating in the province have plans to inaugurate another 550 thousand metric tons of capacity, with all but 50 thousand metric tons of that total consisting of unqualified capacity. Out of Inner Mongolia’s installed capacity of 3.71 million metric tons, up to 1.25 million metric tons is at risk of being shut down by regulators, most of it owned by Jinlian Aluminium (Jinjiang Group). Some 550 kt of new capacity by Jinjiang Group and Chuangxin Group are also at risk of being closed down.
Should Shandong’s capacity indeed be on the chopping block, China’s biggest aluminium firm stands to lose a great deal. China Hongqiao Group, which has of late been the target of a short seller report leveling allegations severe enough to allegedly frighten its external auditor and to cause its stock to be suspended on the Hong Kong Stock Exchange, currently houses all seven million metric tons of its capacity in the province. Although between four million metric tons and 6.2 million metric tons of that capacity has the blessing of local governments, estimates place up to 3.7 million metric tons of it liable to closure on the order of regulators in Beijing. What’s more, with winter closures planned for Q4 2017, Hongqiao’s production levels would plummet even more. Another firm that would be targeted by regulators is Shandong Xinfa, which has 520kt worth of capacity at risk.
Even if alumina prices are forecast to fall in the third quarter of 2017, the combined effect of these closures is that China’s aluminium cost curve will increase since smelters in Shandong, Xinjiang and Inner Mongolia are among the most cost competitive in the country. The resulting market tightness would then lead to higher aluminium prices.
However the details end up, some experts have chalked up the newfound impetus to reign in runaway capacity as fruits of the recent talks between President Trump and Premier Xi. According to Andy Home, while it was Obama who first filed a World Trade Organization case against China’s production practices, Trump has stepped up Washington’s protectionist policies.