Chinese Aluminium: Higher Overhead And Lower Aluminium Prices Squeeze Out Capacity

The Chinese aluminium sector is in peril, and the country’s smelters must soon take drastic and determined action in order to prevent an even steeper dive into the abyss. Such was the verdict of two industry reports released earlier in November, one each by Aladdiny and Antaike.

In the report issued by Aladdiny, analysts noted the combination of low market prices and rising production costs and the damage these twin factors are exacting on the Middle Kingdom’s aluminium sector. Upon analyzing the average weighted costs associated with aluminium productions across the entire country, Aladdiny found that three-quarters of the country’s aluminium producers are hemorrhaging cash. The sole exceptions were smelters in Shandong and Sichuan provinces, which posted a slender 1.8 percent profit margin on average. Despite the negative effects of overcapacity, Yunnan and Guangxi provinces, which are currently suffering losses per ton of CNY633 and CNY720 respectively, are expecting to add even more electrolytic aluminium capacity in 2019.

The inescapable conclusion, notes Aladdiny, is that the profitability of the aluminium sector directly depends on capacity cuts.

For its part, Antaike noted the rapidly weakening state of the country’s aluminium game, offering little good news should current conditions continue unabated. At present the sector’s overall debt ratio weighs in at a staggering 72.5 percent, all while the industry’s overall profits have tanked by 64.8 percent. For example, through the first eight months of 2017, the average profit per ton for China’s aluminium industry came to CNY500. This year’s initial eight-month period showed a stark reversal in fortunes, as the average ton of aluminium produced by Chinese smelters sold for a loss of CNY330. In the same time period, production rose by only 0.2 percent and consumption grew by 4.9 percent, both of which were the weakest rates of increase in a decade.

At year’s end, Antaike expects a 2018 aluminium production total of 36.75 million metric tons, growing by 0.2 percent on the year, and a supply total of 36.8 million metric tons, up by 0.1 percent from 2017. Demand growth of 4.9 percent boosted China’s consumption of aluminium to 37.21 million metric tons, yielding a 410 thousand metric ton market deficit. Globally, analysts expect an ex-China aluminium production of 27.8 million metric tons and a supply of 27.75 million metric tons, up on the year by 1.8 percent and 2.0 percent respectively. A growth in demand of 1.3 percent to 28.94 million metric tons will leave the market wanting 1.19 million metric tons by year’s end, analysts forecast.

Despite this shortfall in production, there is little hope that aluminium prices will save the day, noted Antaike’s analysts. Anemic domestic consumption, sizable aluminium stock already on hand, and significant environmental peril have all acted to limit prices domestically, leading to a weak trend downward. While aluminium prices languished, input costs bulked up – in the same period of atrophied pricing, alumina costs leaped, electricity prices and the weighted average cost of electrolytic aluminum industry maintained at elevated levels, and losses at aluminium smelting plants continued to mount. The situation was a body blow to smelters in high-cost areas and firms with little capital to spare, and the prospect that the punch was only the first of many has made the temptation by those firms to tap out via production cuts an ever more likely possibility.

With the grand litany of perils listed above in hand, Antaike’s analysts projected nationwide production cuts in the coming 50 days, with effects rippling down the supply chain to follow in short order. While production cuts are likely inevitable, Antaike recommended swiftly implementing such cuts in a healthy, sustainable manner to shore up prices before the market’s deterioration forces more drastic and less prudent smelting curtailments.

At present, Antaike’s forecasts for 2019 show a rise in production, but a murky outlook for Chinese demand. The new-year will see a total production grow by 4.5 percent to a total domestic aluminium supply of 38.4 million metric tons, overshooting domestic demand of 38.15 million metric tons, up by only 2.4 percent on the year, netting out an oversupply of 350 thousand metric tons. China’s oversupply will find little help from overseas, as Antaike analysts forecast the ex-China supply growth rate of 5 percent to 29.15 million metric tons and a 1.0-percent rise in demand to 29.5 million metric tons, leaving an aluminium oversupply of 100 thousand metric tons.

Though still stronger than 2016 and much of 2017, analysts don’t see a helpful hand in the deck of market prices, with expectation of average three-month aluminium prices in Shanghai to range between CNY12,500 and CNY15,000 per metric ton, and London prices to hover between US$1,700 and US$2,000 per metric ton.

Aluminium production cuts are coming to China, and soon. The sole debate in 2019 will be whether the powers that be in Beijing will mandate uncomfortable but necessary cuts in the near term, or instead choose to look the other way as the sector’s foundation crumbles and drags aluminium smelting capacity down with it.



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