April 16, 2015 / 5:16 AM / 5 years ago

COLUMN-China aluminium surplus to eat away global deficit: Russell

—Clyde Russell is a Reuters columnist. The views expressed are his own.—

By Clyde Russell

LAUNCESTON, Australia, April 16 (Reuters) - China’s exports of aluminium products have continued to surge, a trend that if continued may push the rest of the world toward a surplus.

China’s exports of primary, alloy and semi-finished aluminium grew by around 43 percent in the first quarter over the same period last year, according to preliminary customs data released on Monday.

While the initial data release doesn’t provide the detailed breakdown, figures for January and February show that the overwhelming share is semi-finished products, such as bars, rods, wire, plates, sheet and foil.

In the first two months of the year, exports in this category, commonly known as semis, surged 91 percent to 770,000 tonnes, a trend that will almost certainly be continued when the detailed March figures are released later this month.

Exports of semis have surged because they get a 13 percent value-added tax rebate, that largely offsets the 15 percent export tax on aluminium.

The tax rebate doesn’t apply to exports of primary aluminium, but it’s a common view in the market that much of China’s exports of semis is melted down and re-fabricated by importers.

These semis are attractive to aluminium consumers outside China, as they are competitively priced against supplies sourced through the London Metal Exchange system, especially once the delivery premium is taken into account.

The benchmark three-month LME contract has lost 2.2 percent so far this year, closing on Wednesday at $1,812 a tonne.

The equivalent contract on the Shanghai Futures Exchange closed at 13,060 yuan ($2,109) a tonne on Wednesday, virtually unchanged from the start of the year.

The gap between the two benchmarks is now just under $300 a tonne, which is roughly the same amount as the premium charged for delivery over LME prices.

This premium varies from region to region, but was about $420 a tonne in Japan in the fourth quarter of last year, a record level that came amid a shortage of the metal outside of China.

With more Chinese aluminium finding its way to regional and global markets, the likelihood is that premiums will continue to drop, at least to the point where supplies from elsewhere become more competitive.

What appears to be happening is that the world’s aluminium market is starting to converge.

CHINA’S SURPLUS TO EASE GLOBAL DEFICIT?

Up to now China has accounted for about half of world production and demand for the metal, and has been largely shut-off from the rest of the world, at least as far as exports are concerned.

But the massive overcapacity of smelters in China has resulted in a surplus of aluminium, which is now finding its way out of the country, either as semis or the so-called fake semis.

With 36 million tonnes of annual capacity and output of about 27.5 million tonnes last year, according to consultants AZ China, there is still plenty of scope for China to boost production.

Production gains may be limited by the poor profitability of Chinese smelters, but if history is any guide, output tends to remain in place as the social cost of shutting plants outweighs financial losses.

Lower power prices may also help boost the profitability of Chinese smelters, which will also keep production in the market.

There has also been some speculation that the Chinese authorities will act to tighten export rules for semis, perhaps removing or lowering their tax rebate.

This change in policy would only make sense if the authorities believed that China was somehow at risk of a supply crunch in aluminium, something that clearly isn’t the case.

In some ways it’s more likely that the export tax on primary aluminium may be lowered, which if did happen would allow for even greater integration between the Chinese and global aluminium markets.

Overall, the trend appears to becoming clearer, namely that Chinese exports are likely to continue to rise and China’s excess capacity is starting to find its way on the global market.

This has implications for high-cost production outside of China, and also means that expectations for a deficit of aluminium in the non-China market in 2015 may have to be scaled back.

It’s also likely to raise pressure for measures against Chinese aluminium, possibly in the form of higher duties in importing countries and anti-dumping investigations.

Editing by Joseph Radford

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