(The opinions expressed here are those of the author, a
columnist for Reuters.)
* Production vs Shanghai price: tmsnrt.rs/2mhkeVp
By Andy Home
LONDON, Feb 21 Global aluminium output was
running at an annualised pace of 62.0 million tonnes in January,
a new all-time record.
Once again this was a record forged in China.
While primary metal production in the rest of the world fell
by 182,500 tonnes on an annualised basis over the course of
December and January, it surged in China.
True, Chinese production figures come with a strong health
warning, particularly at this time of year, but the underlying
trend is becoming increasingly clear.
Smelters are responding to price signals.
In Shanghai, the most actively traded aluminium contract
is trading above 14,000 yuan per tonne for the first
time since November. Excepting last year's late spike, it's the
highest price since early 2013.
The irony is that part of the reason for strong pricing is
the threat of capacity curtailments in China on environmental
The jury is still very much out on whether that threat will
become a reality but in the short term over-production rather
than under-production is a more pressing issue for the aluminium
Graphic on aluminium production vs Shanghai price:
CRANKING BACK UP
Chinese aluminium output hit a new record of 2.95 million
tonnes in January, according to figures from China's Nonferrous
Metals Industry Association (CNIA).
That was equivalent to an annualised rate of 34.7 million
tonnes, 56 percent of the world total, and represented
year-on-year growth of almost 19 percent.
The statistics may overstate the reality.
CNIA aluminium production figures, published by the
International Aluminium Institute, have a history of wild swings
over the period covering both Western and Chinese New Years.
Still, while individual data points may be suspect the
underlying trend points to a significant upswing in production,
as shown in the graphic above.
Chinese aluminium production started to contract in December
2015 and failed to increase during the first half of last year.
That was a reaction to the late 2015 slump in prices to
below 9,000 yuan per tonne, with some producers curtailing
capacity and new projects stalling.
However, the steady recovery in prices over the second half
of 2016 has incentivised restarts and new capacity additions
with production growth turning positive again in September and
accelerating every month since.
THE ENVIRONMENTAL IMPERATIVE
Partly priced into the most recent leg of this price
recovery has been the possibility of the forced closure of
aluminium capacity on environmental grounds.
China's Ministry of Environmental Protection has proposed
shutting industrial capacity in five provinces over the winter
months to alleviate chronic pollution problems in cities such as
Aluminium smelting is one of the industrial sectors
This, it cannot be overstated, is still a proposal and one
that is likely to get plenty of pushback both from aluminium
producers and local governments.
Also, while capacity curtailments are possible they are not
going to happen soon since this winter is almost over.
But as smog rises to the top of the agenda for Chinese
policymakers, the environmental imperative may trump all others,
A more immediate impact from Beijing's new focus on clean
air has been felt by suppliers of precursor materials for
aluminium smelting such as coal tar, pitch and anode.
All these industries were the subject of tough environmental
inspections last year, a clampdown that has continued into 2017,
according to the AZ China consultancy.
"The operating rates of coal tar and pitch plants will be at
a low level over a long term period, and that will put big
pressure on prices," it said.
Rising prices for these often overlooked inputs into the
smelting process represent a real and present driver of higher
aluminium prices, even while the vaguer, deferred threat of
smelter closures lingers in the background.
In the shorter term, however, the increasingly pressing
issue for the current aluminium price rally, both in Shanghai
and in London, is the step-change in Chinese production trends
over the last few months.
JP Morgan, for example, has closed out its recommended long
aluminium position, even while maintaining its view that the
potential for policy-dictated smelter curtailments "skews
aluminium price risk asymmetrically higher in the medium term".
("Metals Weekly", Feb. 15, 2017).
The immediate warning sign comes from rising stocks.
Those registered with the Shanghai Futures Exchange (ShFE)
have surged by 88,496 tonnes to 189,218 tonnes so far this year.
Headline exchange stocks have more than doubled since their
low point of 83,775 tonnes in September last year.
Seasonality is in the mix in the form of the New Year
holidays but resurgent production is also a factor.
JP Morgan, citing figures from the CRU research house, said
that beyond the ShFE, reported Chinese stocks have "increased
nearly 270,000 tonnes since the end of the Chinese New Year
holiday" with an even greater build possible over the coming
weeks as "excess metal from a Q1 17 domestic surplus makes its
way into warehouses".
Adding to the accumulating glut is the renewed flow of metal
that had been stranded in the aluminium production hub of
Xinjiang in the northwest of China by last year's overhaul of
Stocks in Xinjiang are now falling but, according to AZ
China, there are still almost 350,000 tonnes awaiting shipment
from smelters and transport hubs.
STOCKS UP, PRICE UP?
The combination of rising price and rising stocks is not one
that is going to endure for very long.
So far this tension is largely internalised within China.
But whether it remains so is a moot point.
Exports of semi-manufactured products have been the
country's safety valve for excess production in the past.
The export flow fell by 3.0 percent to 4.1 million tonnes
last year, the first annual decline since 2012.
That of course reflected a tighter Chinese market resulting
from a year of supply growth constraint.
The recent production figures suggest the period of
constraint is over and with stocks building, it may only be a
matter of time before exports accelerate again.
If they do, China's resurgent aluminium machine will no
longer just be a matter for the Chinese aluminium price.
(Editing by David Clarke)