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Energy

Column: China's import boom heralds deeper rift in aluminium: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters)

FILE PHOTO: Aluminium bar stock is seen inside a factory in Dongguan, China, April 10, 2018. REUTERS/Bobby Yip/File Photo

LONDON (Reuters) - China’s imports of unwrought aluminium rose again in August, extending a rare inversion of normal trade patterns.

Combined imports of primary metal and unwrought alloy totalled 393,000 tonnes, just shy of the previous record of 394,000 tonnes in April 2009.

For the second consecutive month the world’s largest producer was a net importer of aluminium in all forms.

It’s no coincidence that the only reference point for such high imports is the global financial crisis. That was the last time aluminium demand experienced the sort of hit now being generated by the COVID-19 pandemic.

Now, as then, China’s recovery is proving faster and more powerful than anywhere else. China’s smelters are responding by lifting production, even while output in the rest of the world is sliding.

If history is repeating itself, it will mean a further polarisation of the global aluminium market into two parallel universes - China and the rest of the world.

That spells more trade tension ahead.

IMPORT BOOM ROLLS ON

China’s imports of primary aluminium accelerated further in August to 248,000 tonnes from July’s 185,000 tonnes.

The record monthly high in April 2009 was 362,000 tonnes. Cumulative imports this year have reached 595,000 tonnes, compared with 1.45 million tonnes in 2009, the only point of historical comparison.

However, a key difference between past and present crises is the simultaneous surge in imports of unwrought aluminium alloy. Cumulative net imports this year total 653,000 tonnes. China remained a net exporter of this form of aluminium in 2009, to the tune of 21,000 tonnes.

While flows of both types of aluminium have been determined first and foremost by an import-positive arbitrage window between London and Shanghai markets, the step-change in alloy trade may be more structural.

Alloy is largely produced from scrap metal and it seems no coincidence that imports have been rising just as China’s scrap imports decline because of a tightening of purity restrictions.

Scrap flows from both the United States and Europe have been redirected to other Asian countries for remelt into alloy. Malaysia has emerged as a major beneficiary of this offshoring, accounting for 28% of China’s total alloy imports over the June-August period.

It’s a moot point whether China’s scrap imports, which have slumped by 51% this year, will ever fully recover, even if the country delivers on its promise to exclude higher-grade material from its current import ban.

Imports of primary metal will wane as the arbitrage window closes, but imports of alloy could stay above historical norms going forwards.

PARALLEL UNIVERSES

The once-in-a-decade reversal of normal trade patterns is down to the arbitrage gap between an outperforming Shanghai Futures Exchange (ShFE) and a lagging London Metal Exchange (LME).

LME aluminium, trading at about $1,770 a tonne, is down 2% on the start of the year, while the most active Shanghai contract was up by 11% ahead of this week’s public holiday.

Underlying this divergence is China’s relatively swift exit from coronavirus lockdown and Beijing’s infrastructure-heavy stimulus package.

Most of the rest of the world is struggling to stage a similar recovery and promised industrial stimulus measures are still only starting to take shape.

Chinese aluminium consumption is expected to contract by a marginal 0.25% this year, while the rest of the world will experience a 14.5% slump, according to research house CRU.

That would translate into a small supply-demand surplus of 900,000 tonnes in China and a much larger 2.9 million tonnes in the rest of the world, CRU’s latest assessment shows.

No surprise then that Chinese smelters are starting to ramp up production, while those in the rest of the world are back in survival mode in the face of low prices.

China’s national aluminium output was unchanged in August relative to July, but cumulative production this year is up 2.7% on 2019, with more capacity expected to come online in the coming months.

Production in the rest of the world, by contrast, has been sliding. August’s annualised run-rate of 25.5 million tonnes was 942,000 tonnes lower than December 2019, the International Aluminium Institute (IAI) says.

China’s share of global production has risen from 56% to 58% this year. That’s a level exceeded only once previously, in June 2017, but with the important caveat that the IAI was then using the highly volatile official statistics rather than its own estimates.

HEIGHTENED DEPENDENCY

On current trends, China’s control of the primary metal segment of the aluminium supply chain is only going to grow this year.

The same script played out during the last crisis, when China’s share of global production jumped from 29% to 39% over the course of 2009.

The intervening decade has brought steadily increasing Chinese exports in the form of semi-manufactured products such as sheet and foil and increasing push-back from the rest of the world.

President Trump’s 10% tariffs on aluminium imports may have grabbed the trade headlines, but arguably more significant to global flows of aluminium has been the proliferation of product-specific anti-dumping complaints.

The list of penal tariffs continues to lengthen.

The European Union last week slapped provisional anti-dumping duties of up 48% on aluminium extrusions from China.

The U.S. Aluminum Association last week filed anti-dumping petitions on imports of foil from five countries in the latest sign that Chinese exports continue to create a domino effect of displaced products.

Right now, China’s exports of semi-manufactured products are running at a slow pace, down 16% year on year for January-August, thanks to the export-negative arbitrage and low global demand.

But once the arbitrage window closes and imports drop, which most observers think will happen by the end of this year, expect the focus to return to Chinese export penetration of other markets.

By that stage China’s dominance of the global aluminium market seems likely only to have grown further.

Editing by David Goodman

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