April 12, 2016 / 6:05 PM / 4 years ago

Resurgent Chinese aluminum draws back capacity at industry's peril

HONG KONG/MELBOURNE (Reuters) - Rising aluminum prices are enticing smelters in top producer China to restart output, a decision that may snuff out the metal’s rally from record lows and stoke global trade tensions.

A worker walks among piles of aluminum ingots at a storage of aluminium plant in Yuncheng, Shanxi province January 7, 2010. REUTERS/Stringer

Chinese prices for aluminum, used in transport and packaging, have rebounded about 21 percent since hitting a record low last November, mainly after domestic smelters agreed to shut in 4.6 million tonnes per year of primary capacity, or more than 10 percent of total smelting. Restarting a portion of that capacity may mean Chinese exports seep back into the global markets at a time when the country is already under fire for flooding the world with steel and other metal exports.

About 1.4 million tonnes per year of aluminum smelting capacity may come back in 2016, mainly in the second half of the year, said Wan Ling, an analyst at metals consultancy CRU. That is equivalent to about 4.3 percent of the 32.2 million tonnes per year that was operating in November 2015, the last time China published the data.

Traders and analysts estimated that the Chinese smelters would likely begin to return in July with exports picking up that same month.

“If prices continue to rise, some firms are possible to restart production,” Jia Mingxing, vice president of the China Nonferrous Metals Industry Association (CNMIA), told Reuters by phone on Monday.

Rising aluminum prices have coincided with the decision in December by Chinese smelters to shut capacity, a move that was followed by plans by six smelters to form a joint venture to possibly stockpile up to 1 million tonnes of the metal. However, this has led to concerns that the recent price gains have no fundamental basis.

“There is a hope for better demand conditions, but it’s not yet clear that there is an uplift in demand that can justify the price strength,” said analyst Dan Morgan at UBS in Sydney.

“Aluminum is not alone. There is definitely a risk that restarts will cap global prices - iron ore, steel, alumina - unless we see a far better China economic picture emerge.”

The front-month contract on the Shanghai Futures Exchange fell to a record low of 9,710 yuan ($1,504) a tonne in November last year and the price has risen since, trading at 11,775 yuan on Tuesday.

China’s smelters are reconsidering the stockpiling plan in light of the price gain, said CNMIA’s Jia. He added, though that the plan was still alive would go into effect if prices fell.

Any sign of idled capacity returning would raise concerns that smelters will not keep inefficient capacity shut to support domestic prices, industry sources in China said, which would weigh on local prices and prompt exports of aluminum products, particularly semi-finished material.

TRADE TENSIONS MAY RISE

In addition to potentially choking the recent price gains, a surge in Chinese aluminum exports could exacerbate tensions with the country’s trading partners who have accused China of selling steel and aluminum at below market rates.

The U.S. International Trade Commission on April 6 launched an investigation into the U.S. aluminum industry and the global trade in the metal, a move that analysts said was aimed at staunching the flow of exports from China.

Australia has asked its anti-dumping regulator to fast track advice on whether swelling shipments of steel and aluminum from Asian countries, including China, have unfairly hurt local businesses, while India in February raised import duties.

Smelters may consider reopening idled capacity if spot prices rise above 12,000 yuan per tonne and stay at that level for two to three months, said Xu Hongping, analyst at China Merchants Futures.

Production costs for the majority of the idled capacity are about 11,000 yuan a tonne but the added restart expenses would push up the break even mark to about 12,500 yuan, she said.

Still, some may not restart even if prices rise to 12,000 yuan a tonne.

Aluminum Corp of China’s (Chinalco) Liancheng smelter is unlikely to reopen some 250,000 tonnes of idled capacity this year because Chinalco last year agreed to cut production, said a source with direct knowledge of the smelter’s operations who declined to be identified as he is not authorized to speak to the media.

Liancheng had been set to close all their capacity but has idled only about half since late 2015 after the local government in the northwestern province of Gansu agreed to cut electricity prices, he said.

Reporting by Polly Yam in HONG KONG and Melanie Burton in MELBOURNE; Editing by Christian Schmollinger

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