(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, Oct 26 (Reuters) - Aluminium touched a new six-year low of $1,479 per tonne in London last week.
It’s now trading at levels close to those seen during the depths of the Global Financial Crisis, when the London Metal Exchange (LME) three-month price fell briefly as far as $1,279 in February 2009.
And if you think that’s bad, the situation in China is even worse.
The front-month contract on the Shanghai Futures Exchange (SHFE) closed Friday at 10,580 yuan per tonne, within spitting distance of the December 2008 trough of 10,040 yuan.
Basis the most liquid SHFE contract though, the price has already fallen far further than the 2008-2009 low of 13,665 yuan.
At such depressed price levels, around 90 percent of China’s huge aluminium smelter sector is operating at a loss, according to consultancy AZ China.
However, Chinese production is still rising. September’s annualised run rate was a new record at 33 million tonnes.
The country continues to pump its surplus out to the rest of the world, depressing prices and pushing more smelters elsewhere to the brink of closure.
This is shaping up to be a Darwinian battle for survival with increasingly geopolitical overtones as the U.S. industry leads the fight-back against Chinese exports.
China has some of the most modern and lowest-cost smelters in the world, most of them located in northwest provinces such as Xinjiang.
It also has a host of higher-cost plants which should, on paper at least, be out of business.
To understand why they are still operating, consider the case of the Liancheng smelter, owned by state operator Chinalco.
The 550,000-tonne per year plant has recorded losses of 1.99 billion yuan ($313 million) since 2011, according to a report on the website of industry body China Nonferrous Metals Industry Association.
Average production costs were 13,850 yuan per tonne in the first eight months of the year, way below prevailing market prices.
So no huge surprise that Chinalco vice president Jiang Yinggang said the plant would have to close.
Except it hasn’t.
According to AZ China, the local government of Gansu province has lowered the cost of power to the plant to the point that Liancheng can at least break even at current prices, signalling “just how determined local governments are to keep smelters open.” (“Entering the winter of China Aluminium’s discontent”, Oct. 24, 2015)
U.S. producer Century Aluminum can only dream of such local support.
It is engaged in tough negotiations on a new power supply contract for its Mt Holly smelter in South Carolina. What is “the newest, most efficient and, except for its power costs, the lowest cost smelter in the U.S.” will close by the end of this year unless a deal is reached.
Century has already permanently closed its Ravenswood smelter in West Virginia and slashed output at its Hawesville plant to 40 percent of capacity.
The United States now has just eight operating plants, including Mt Holly, less then the number of idled smelters in the country.
It’s no longer inconceivable that the U.S. aluminium smelter sector might disappear altogether over the coming years, leaving a large void in the national supply chain.
At the moment any supply-demand gap in the aluminium market outside of China is being filled by Chinese exports of semi-manufactured products.
These represent the country’s pressure valve for domestic surplus, allowing exporters to avoid the prohibitive 15 percent tax on exports of metal and instead earn tax rebates on their exports of value-added products.
China’s exports of such products have totalled 3.14 million tonnes so far this year, 620,000 tonnes more than in the same period of 2014. The difference is about as much as Century produced from all three of its U.S. smelters last year.
The pace of exports has slowed a touch over the last couple of months, reflecting less-profitable arbitrage between the Chinese and international markets.
But the outbound flow is also structural. Without it, China’s own smelters would face widescale closures, a political anathema to local and central government.
Such are the geopolitical stakes in this market and as prices head ever lower, the tensions are rising in the form of attacks on those Chinese exports.
The first salvo of what might turn out to be a protracted war has just been fired by the U.S. Aluminum Extruders Council (AEC).
The AEC has taken aim at China’s Zhongwang Group, which it accuses in a petition filed with the U.S. Commerce Department of evading U.S. import duties.
The imposition of duties in 2011 against several Chinese aluminium product companies, including Zhongwang, is a reminder of just how long these trade tensions have been bubbling away.
But they are now boiling over, in part because of pricing pressures and in part because U.S. aluminium players are incensed that some of China’s exports of semi-fabricated product may not be what they claim to be.
Talk of “fake semis” has been doing the rounds for some time but the AEC petition is the first by a trade body explicitly to accuse a Chinese company of producing aluminium in a form tailored to bypass U.S. duties and, incidentally, China’s own export regime.
Others, such as the Aluminum Association, are also turning up the heat, calling on U.S. regulators to probe the potential “mislabelling” of Chinese aluminium product exports.
Even while the political pressure to counter Chinese semi exports rises, Chinese producers themselves are lobbying hard to get the 15 percent export tax on primary aluminium removed.
This is by no means a new development and so far the Chinese authorities have resisted. But how long can they continue to do so amid mounting losses across what is viewed as a strategic industrial sector?
The simple truth here is that at current prices, whether they be London or Shanghai prices, more smelters are going to have to close.
The only question is which governments value most their aluminium smelter sectors.
Economics is going to become increasingly enmeshed with politics. The first shots in this war have just been fired. They will not be the last.
Editing by David Evans