December 20, 2017 / 7:08 AM / a year ago

Aluminum under pressure after China smog cutbacks fall short

LONDON (Reuters) - The price of aluminum has struggled in recent months as authorities in top producer China have failed to fully implement temporary winter smelter closures to slash pollution.

FILE PHOTO: A worker walks through an aluminium ingots depot in Wuxi, Jiangsu province, China September 26, 2012. REUTERS/Aly Song/File Photo

Lukewarm demand and new smelter projects in China are also poised to lead to more metal piling up, with inventories in the country already at record highs.

China has seen sizzling growth in aluminum production over the past decade and now accounts for around half of global output.

Benchmark aluminum on the London Metal Exchange has gained 23 percent this year, but has failed to make further headway after touching a peak of $2,215 a ton in October, the highest level in more than five years.

On Tuesday, aluminum - used in transportation, construction and packaging - was trading at around $2,090.

The rally in aluminum was largely driven by the announcement by the Chinese government of a crackdown on illegal aluminum capacity and temporary shutdowns of some production during the winter to curb pollution.

While around 3 million tonnes of annual illegal aluminum capacity has been shut down, there has been less success in suspending 30 percent of capacity from Nov. 15 to March 15 in 28 cities that suffer most from air pollution, said Eoin Dinsmore, principal consultant at CRU.

“The winter closures are being less strictly implemented. Today, only about 600,000 tonnes per year of annual capacity has been closed,” he said.

That compares to around 3 million tonnes of capacity that was due to be closed during the winter if the 30 percent target had been followed, Dinsmore added.

The world’s largest aluminum producer, China Hongqiao Group, has largely avoided steep cuts.

Official Chinese data showed China’s primary aluminum production fell for a fifth consecutive month in November to the lowest level since February 2015.

The declining trend in Chinese aluminum production is expected to reverse after the winter shutdowns conclude and new smelter projects ramp up, analysts said.

“Companies that are still profitable will seek to grow their output once the winter cuts are finished,” said Paul Adkins, managing director of consultancy AZ China in Beijing.

“We expect around 3.9 million tonnes of new capacity in 2018, centralized in Inner Mongolia and Guangxi provinces,” he told the Reuters Global Base Metals Forum.

At the same time, the smelter cutbacks have led to a dip in Chinese demand for the metal in the fourth quarter, according to analyst Natasha Kaneva at JPMorgan.

“Air pollution policies in the northeast of the country have

suppressed demand beyond normal seasonality as major construction projects were mothballed,” she said in a note.

Kaneva has boosted her forecast for an aluminum surplus this year in China by 18 percent to 2 million tonnes.

The excess metal has led to a build up of inventories in warehouses monitored by the Shanghai Futures Exchange, which have surged six-fold this year to 736,389 tonnes.

The rise in Chinese stocks has been balanced by a slide in LME inventories, but it still raises the prospect that exports of Chinese aluminum products will increase.

“Exports of semis (semi-fabricated products), which were lower in Aug-Oct may soon lift again,” analyst Daniel Morgan at UBS said in a note.

Reporting by Eric Onstad, editing by David Evans

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below