(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, April 21 (Reuters) - Is aluminium the new steel for China’s policy-makers?
The country’s steel producers are already being subjected to a host of measures intended to weed out excess capacity.
A wholesale restructuring of the enormous steel sector is a key component of the country’s declared war on pollution.
It also provides some negotiating leeway for China when it comes to dealing with the growing international pressure to rein in exports.
China’s aluminium producers, which like their steel counterparts now dominate global supply, seem to be next in line for “supply-side reform”.
Threats to close capacity in the region around Beijing over the winter heating months had already propelled aluminium prices higher.
They have just been given a further boost by news that Beijing has ordered the suspension of new capacity in the northwestern province of Xinjiang. Further measures seem certain to follow.
The country’s aluminium output growth is already showing signs of braking sharply, although, as ever, statistical confusion may simply be adding to the general confusion as to what Beijing’s real aluminium policy goals are.
Beijing’s plan to force capacity reductions in the area around the capital city next winter had already lit a fire underneath the aluminium price.
Sceptics argue that the size of the likely cuts will be dwarfed by the continuing roll-out of new capacity, particularly in the far-flung northwestern province of Xinjiang.
That calculation has now just been thrown into question after three Xinjiang smelter projects were ordered suspended last weekend.
Xinjiang has emerged as the new hub of both Chinese and global aluminium capacity with more than seven million tonnes of operating production and a seemingly endless supply of new smelter projects.
Work on three of those has been ordered to stop because they have not been correctly permitted.
The order, posted on the government website of Changji County in Xinjiang and dated April 14, specifically identifies smelter projects being built by Xinjiang East Hope Ferrous Metals Co. Ltd., Xinjiang Qiya Energy Aluminium Electric Co. Ltd. and Xinjiang Jiarun Resources Co. Ltd.
The amount of capacity affected is thought to be around two million tonnes.
Quite why these three projects have been singled out, and, unusually in such cases, specifically named, continues to cause head-scratching both within China and without.
The best bet is to send a warning shot across the bows of other producers.
According to consultancy AZ China, another policy document is doing the rounds calling for all the country’s smelters to submit to audits covering the full spectrum of permitting and regulatory compliance.
Previous attempts to clean up the sector after years of unbridled growth have come and gone without any noticeable impact but this time Beijing seems serious with multiple government departments involved.
AZ China’s preliminary view is that capacity closures will take place towards the end of the year.
China’s current production rate, meanwhile, seems to be slowing sharply.
The country produced 2.71 million tonnes of aluminium in March and 8.19 million tonnes in the first quarter of this year.
Quarterly production was up 14 percent on the same period of 2016 but growth in March itself slumped to just 3.3 percent.
The year-on-year comparisons are distorted by last year’s low and volatile base.
Expressed in annualised terms Chinese run-rates have dropped by almost 2.2 million tonnes so far this year with March’s 31.9 million tonnes the lowest since July of last year.
It’s a counter-intuitive outcome. The current high price might have been expected to encourage faster production rates, particularly from those companies now facing potential capacity cuts from the start of the winter heating season in the middle of November.
It is, of course, possible, that the statistics themselves are wrong. There have been enough problems in the past to justify a healthy degree of caution, but it’s worth noting that the two sets of official production data, from the National Bureau of Statistics and the China Nonferrous Metals Industry Association, are saying the same thing.
Statistical uncertainty is compounding the uncertainty over Chinese aluminium policy.
Although aluminium is now the best performer among the core base metals traded on the London Metal Exchange, up 15 percent so far this year at a current $1,945 per tonne, there is still a deep-seated scepticism that Beijing is serious about closing capacity.
After all, recent aluminium history is littered with restraining edicts from Beijing, none of which has prevented the runaway growth of its production sector.
Is it going to be any different this time?
Two things suggest it might be.
Environmental crackdown has risen to the top of the domestic policy agenda and aluminium smelters, as seen in the winter heating directive, are clearly in the firing line, not least because they are a major user of coal power.
Secondly, as with steel, “supply-side reform” is being given extra impetus by the proliferation of trade cases against Chinese exports.
Although it is President Trump currently grabbing the protectionist headlines, it was the outgoing Obama administration that filed a broad-reaching case against the Chinese aluminium sector with the World Trade Organization.
China has, unsurprisingly, strongly denied it has subsidised its aluminium producers, the base of the WTO complaint, and can be expected to defend itself rigorously.
But it will be easier to do so, if it can claim to be actively curtailing excess capacity.
This seems to be the policy in steel and, given the similarities between China’s role in global supply in both markets, it must offer Beijing a tempting template for aluminium.
Not least because the Trump administration has just raised the trade stakes further with a new probe into steel imports in the U.S.
How long before it does the same for aluminium imports? (Editing by Elaine Hardcastle)