According to sources with knowledge of the situation, China Hongqiao Group began curtailing outdated aluminium capacity on Tuesday, coinciding with an announced crackdown by the government of the People’s Republic of China on illicit aluminium smelting capacity.
Although the company demurred when asked for details, sources who spoke to Bloomberg on Tuesday said that Hongqiao began cutting 250 thousand metric tons per annum of capacity. The sources opted not to identify themselves as they said the information they gave was not meant for public consumption.
Analyst believe that the move displays Hongqiao’s resolve to act in good faith relative to the supply-side reform policy advocated by Beijing as well as giving the broader market a greater measure of confidence that capacity cuts will actually be made. Such moves have already shown positive ramifications in the marketplace, bolstering the price of aluminium on the London Metal Exchange by three-tenths of a percent to US$1,892 per metric ton yesterday.
In addition to metal prices rallying on the news, the stocks of publicly-traded companies in the smelting business rose as well. Stocks of Aluminum Corp. of China Ltd. rose by 2.2% at the Shanghai exchange, propelling the price to a seven-week high. Shares in Yunnan Aluminium Company jumped by double that amount yesterday as well.
Analysts project that this is just the beginning of capacity cuts, as there still remains a significant swath of aluminium capacity still operating outside the confines of the law.
“We estimate that 3.1 million tons, or 8 percent of total operating capacity, is without proper approvals, hence we expect more production cuts in the coming months,” Citigroup Global Markets Asia analyst Jack Shang told BloombergMarkets. “Winter production suspensions in North China should help further tighten the aluminum market in China.”