Cracks Emerge in China’s Push to Reign In Aluminium Production

Cracks Emerge in China’s Push to Reign In Aluminium Production

Though Beijing has made strides in reforming the supply-side of its aluminium sector in recent months, indications lately emerging from local governments in the People’s Republic of China reveal that their resolve may not be as strong – at least according to a recent CRU report.

The first inclination to the wider market that something was amiss was the bearishness of China’s aluminium trade on the Shanghai Futures Exchange (SHFE). Coming off the Dragon Boat Festival on May 30, aluminium cash and three-month prices dipped, both off almost three percent a piece six business days later on June 7.

Over the course of the past two weeks, Changji county’s website has taken a decidedly different tack on the issue of supply-side reform than it has in the past. The county in China’s far-western Xinjiang province published a listing declaring 1.1 million metric tons per year of capacity from Shandong Xinfa’s plant in Liaocheng City to be illegal after having failed an environmental inspection. The document detailed the fact that the capacity in question lacked proper approvals from China’s Ministry of Industry and Information Technology and its Ministry of Environmental Protection. The plant’s captive power operation also failed to meet the required environmental standards.

In addition, and conspicuous now by its absence, is a now-missing document released mid-April declaring the government’s finding that 800,000 metric tons per annum of smelting capacity under construction by Xinjiang East Hope, 400,000 metric tons being constructed by Xinjiang Jiarun, and another 800,000 metric tons per annum of smelting capacity being built by Xinjiang Qiya should be suspended.

Though it is likely too soon to draw firm conclusions, experts believe this may represent the first hairline crack in what could become a significant breach in the wall of China’s resolve to tame its out-of-control aluminium production. While pundits hold out hope for the continuation of such reforms, they point out that documentation now available on Changji’s website no longer offer lists detailing specific illegal capacity, detailed plans, and methods for implementation of Beijing’s push to bring aluminium production back down to Earth. Such opacity has begun to send ripples into the aluminium market, sowing seeds of skepticism that are quickly flowering into disbelief that the capacity cuts promised earlier this year will soon come to fruition.

Additionally, lower prices have chummed the Chinese waters, whetting the appetite of downstream producers looking for a bargain and attempting to restock their stores after China’s summer solstice celebration.

China’s capacity continues to see restarts and ramp-ups outside of the illicit capacity described above, which is likely to help push stock levels back to higher levels. CRU reports that Baise Yinhai’s smelter in Guangxi will add another 150,000 tons per year of capacity to its existing output of 50,000 tons per year beginning at some point this week. Shanghai Meixin’s smelter is also in the midst of switching on 400,000 tons per annum of capacity, which is expected to begin churning out aluminium in October.

Though meaningful supply-side reform of China’s aluminium market is far from a certainty, the coming months will still present challenges to it. Another round of inspections begin this month, stretching through next February and blanketing the Guangdong cities of Guangzhou, Shenzhen, Foshan, Dongguan, Zhongshan, Jiangmen, Zhaoqing, Qingyuan, and Yunfu. Inspections will be carried out at downstream plants and, if the past is any indication, such inspections are likely to see re-melting furnaces shut down, making aluminium ingot more difficult to find in those markets.

Also looming on the horizon for China’s smelters is the possibility of Beijing holding captive power plants to the same accountability standards as coal-fired plants that provide electricity to the general public. What this means is that these plants will shell out their own money for policy-related funds and cross subsidies. At the same time, the government will be investigating such plants and pulling the plug on those found to be in violation of environmental standards. Such activities will only push power prices upward, taking up the slack in Chinese smelters’ margins.