May 14, 2009 / 10:30 AM / 10 years ago

METALS INSIDER:Can China regain control of its aluminium sector?

— Andy Home is a Reuters columnist. The opinions expressed are his own. For more Metals Insider columns, top Reuters metals stories and third party content, please visit the free Base Metals Community website at (www.metalsinsider.com) —

By Andy Home

LONDON, May 14 (Reuters) - China’s State Council has just published a broad-ranging plan to “revitalise” its metals production sector. [ID:nHKG55402]

The programme includes targets for closing obsolete capacity and for consolidating highly fragmented production sectors such as zinc, lead and aluminium.

However, when it comes to the light metal, aluminium, it is a highly moot point as to whether Beijing has not already lost control of its primary smelter sector.

If it has, the landscape of the global aluminium market is going to look very different going forward and a lot of assumptions as to how global supply reacts at times of boom and of bust are going to have to be rethought.

HERE WE GO AGAIN

The eagerly-anticipated “revitalisation” plan envisages the closure of 800,000 tonnes per year of older, pre-baked aluminium capacity, a moratorium on new projects for three years and an ambition that by 2011 the top 10 producers will control 70 percent of national production.

For a FACTBOX on the plan, click on the following link: [ID:nPEK242957]

These policies are by no means new. Beijing has been battling for many years to restrain what it terms “blind investment” in its primary aluminium sector.

Beijing has in recent years issued multiple orders and restrictions aimed at achieving exactly the same goals articulated in the most recent plan.

Often such diktats have seriously backfired. So, for example, restrictions on the size of aluminium smelters and the technology used by them merely encouraged smaller operators to build extra capacity to avoid closure.

The imposition of an aluminium export tax, intended to prevent smelters using up much-needed power just to ship it overseas in the form of metal, caused systematic misrepresentation of primary aluminium as “product.” Primary exports plummeted after the 15-percent tax was introduced at the end of 2006, but exports of “product” and “alloy” soared.

Is this time going to be any different?

A DROP IN THE OCEAN

And will it make any difference, even if it is?

A very useful perspective on that 800,000-tonne-per-year closure figure comes from a paper presented earlier this week at the CRU Aluminium Conference in Dubai by Wan Ling, the research house’s aluminium specialist in China.

In an extensive analysis of the state of play in the Chinese aluminium sector Wan Ling dropped something of a statistical bombshell.

She said that CRU estimates that in both 2007 and 2008 an additional 3 million tonnes per year of new smelter capacity was built in China.

This, remember, is already the largest producing country in the world. Output last year was 13.11 million tonnes, according to the China Nonferrous Metals Industry Association, accounting for 34 percent of global production.

Nor has the aluminium frenzy been halted by the slump in prices seen over the back end of 2008 and early this year. CRU estimates that another 1.5 million of installed capacity will be completed this year, i.e. almost double the amount of capacity that will be closed under Beijing’s “revitalisation” plan.

FASTER SWING

Much of this new capacity has not yet been brought on stream because of the aluminium price collapse. Of last year’s 3.0 million tonnes, for example, CRU thinks that 2.6 million tonnes had not been activated by the end of December.

Factoring in this year’s expected new additions, there is something like 4.1 million tonnes of new Chinese capacity waiting to be fired up as soon as prices improve.

Indeed, it may already be starting to happen thanks to the Chinese government’s support for the domestic industry in the form of buying stocks at above-market prices.

This is not good news for an already oversupplied market and places a big question mark against the efficacy of the many production cuts taken by non-Chinese producers.

Western producers may also have another headache to deal with. Wan Ling pointed out that just as Chinese producers have been much faster to cut production in the current cycle trough, they could also be much quicker to restart or to bring on new capacity.

This speed of reaction to market developments threatens the future of the market’s traditional “swing” capacity, much of it concentrated in the United States, which is slower to close at times of low prices and slower to reopen at times of recovering prices.

MADE IN CHINA

There is another big difference between this new “swing” capacity and that in the Western World.

The aluminium production sector is a pillar of many provincial economies in China and will accordingly be protected at times of low prices. This has been clearly demonstrated by the multiple central and state stockpiling plans, whereby surplus metal has been bought by government to allow smelters to keep producing metal and keep employing workers during the current low price environment.

In this context the latest “revitalisation” plan amounts to no more than a marginal tidying-up exercise.

The aluminium genie escaped from the bottle some time ago and Beijing, even if wanted to, is not going to be able to put it back in again.

This means that an ever greater portion of the world’s aluminium is going to be made in China, which even though it is the biggest consumer is already in structural supply-demand surplus.

It also means that an ever greater part of global production will be as much subject to “strategic” state considerations as it is to free-market supply-demand dynamics. (Editing by James Jukwey)

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