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China aluminum capacity cuts boost market leaders, prices
August 3, 2017 / 7:03 AM / 4 months ago

China aluminum capacity cuts boost market leaders, prices

BEIJING/MELBOURNE (Reuters) - China’s crackdown on its bloated aluminum industry is driving up the share price of the country’s major producers and raising the specter of a tighter global market that could buoy prices.

FILE PHOTO: Workers ride on an motor rickshaw through an aluminium ingots depot in Wuxi, Jiangsu province in this September 26, 2012 file picture. REUTERS/Aly Song/File Photo

China is forcing the suspension of aluminum plants that have not obtained proper permits to build or expand, or that have not met strict environmental standards, as Beijing pushes to clear its skies and shore up loss-making industries.

China accounts for nearly 60 percent of global aluminum output and analysts estimate some 3-4 million tonnes of capacity could close this year, around a tenth of the country’s total, tightening the global market.

China Hongqiao Group Ltd, the world’s largest maker of aluminum, said on Wednesday it plans to shut more than 2 million tonnes a year of outdated smelter capacity. This would be replaced with new capacity, but it gave no timeframe.

Beijing has also ordered steel and aluminum producers in 28 cities to slash output during the winter heating season that starts in November to curb pollution, spurring local investors to anticipate gains for big producers when a shortfall bites.

Shares in state-run Aluminium Corp of China (Chalco) have surged 47 percent since the start of July, while shares in Shenzhen-listed Yunnan Aluminium have rallied 55 percent.

“Chalco is the market leader, so if (competitors) are closing down their capacity, they are able to expand their production,” said analyst Helen Lau of Argonaut Securities in Hong Kong.

Both Deutsche Bank and Wood Mackenzie see 3 million tonnes of capacity being shut in the current round of cuts, while CLSA says 2 million tonnes has been closed and another 2 million tonnes of illegal capacity is still operating.

So far, China’s aluminum market is showing little sign of supply stress. Stocks of aluminum in Shanghai Futures Exchange warehouses are the highest in four years, while premiums are close to five-year lows and near-term prices are well below those further out.

Aluminium prices have climbed, but may have further to run, analysts say. Shanghai aluminum hit a three-month highs on Wednesday to be up around 11 percent this year, while benchmark aluminum on the London Metal Exchange has rallied 14 percent to around $1,920 a tonne.

“The trend is definitely towards a much tighter market balance - there is an upshot to prices here definitely,” said London-based WoodMackenzie analyst Ami Shivkar.

“The China market is in a surplus so any closures in China will whittle away the little bit of surplus that we have in China, and put the global market in a deficit.”

LME aluminum prices could briefly top $2,000 a tonne, but could then come under pressure, and if regulators give the go-ahead for new plants to start operating next year, Shivkar said.

“It doesn’t make sense to keep brand new capacity offline for a long time.”

Reporting by Tom Daly and Melanie Burton; Editing by Richard Pullin

Our Standards:The Thomson Reuters Trust Principles.
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