Column: The world’s largest aluminum producer still short of metal: Andy Home

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Workers ride a motor rickshaw at an aluminum ingot depot in Wuxi, Jiangsu province, September 26, 2012. REUTERS / Aly Song / File Photo

April was another record month for Chinese aluminum production, the latest in a series dating back more than a decade that saw China’s share of global production drop from 40% to almost 60%.

It produced 3.2 million tonnes in April, 8% more than a year and the equivalent of 39.2 million tonnes annualized, according to the International Aluminum Institute (IAI).

China’s seemingly inexorable rise to power has long been the dominant theme in the aluminum market, both in terms of consistently low prices and the proliferation of trade disputes as countries resisted its exports of semi-finished products. -finished.

These exports continue to flow, totaling 1.66 million tonnes in the first four months of this year.

But China is currently running out of aluminum raw material, with imports of primary metal and alloy still high. The country’s transition to net importer status last year initially looked like a disconnect from the COVID-19-related recovery, similar to that which occurred during the global financial crisis more than a decade ago, when China had for the last time need to tap international supplies.

But China’s net imports are starting to look like the new normal as the global economy stabilizes from the depths of the coronavirus crisis. China’s dominance in the global supply chain has taken on a whole new narrative turn.

ANY CHANGE IN ALLOY

China’s raw aluminum alloy trade has undergone a structural transformation over the past year.

The country is historically a net exporter of aluminum in this form, with outgoing shipments of around 515,000 tonnes per year between 2015 and 2019.

Last year, however, China imported 1.2 million tonnes of crude alloy and remained a net importer in the first four months of 2021 at 246,000 tonnes.

Goldman Sachs analysts last year pointed to a shift in building materials as the driver of alloy demand. An increasing number of provinces have banned the use of wood for pouring forms in channels used for laying concrete. (“Aluminum: China’s waterproofing should continue in 2021”, October 27, 2020)

The switch to aluminum alloy for form casting is expected to increase demand by 500,000 tonnes last year alone, the bank said.

The increase in appetite for alloys coincided with the reduction in imports of aluminum scrap, used in smelting alloy production.

China has bowed to plans to ban imports of recyclable metal altogether, allowing a better “resource” to reenter the country.

Imports of scrap aluminum have started to increase again. The count of 333,600 tonnes of bulk weight from January to April was up 23% year-on-year. But the recovery in volumes is mixed compared to copper scrap flows, which jumped 82% over the same period.

It remains to be seen whether the supply chain for scrap alloys has irreversibly changed in reaction to Beijing’s previous policy of gradually tightening scrap purity thresholds.

PRIMARY FLOW

China has been a net importer of primary aluminum every month since December 2019. Net imports totaled 1.06 million tonnes last year and were 486,000 tonnes in the first fourth month of 2021.

Monthly flows have been more volatile than those of the alloy and are expected to remain so, being more directly impacted by fluctuating arbitrage between the London and Shanghai markets.

But underlying the monthly noise is the combination of China’s stimulus-fueled manufacturing recovery and signs that the country’s giant foundry industry has no room for expansion.

There is a theoretical gap between current execution rates and the government’s official capacity cap of 45 million tonnes per year, but it is partly filled by “illegal” capacity that was ordered to be closed during the reforms. sector of the last decade.

This means that the operational gap is much smaller right now. Moreover, China’s pivot towards decarbonization is already a problem for an aluminum sector heavily dependent on coal for its energy.

Energy-related cuts in Inner Mongolia have so far been modest, but the direction of the trip is clear, especially as the local government has pledged not to approve new aluminum smelter projects. as it tries to meet energy efficiency goals.

The rest of the world has become accustomed to China’s ability to start a few new foundries at any sign of price strength. Indeed, its previous enthusiasm for doing so is the reason why so much metal has seeped out of the domestic market in the form of exports of semi-finished goods.

But there is a growing awareness, both in China and elsewhere, that this particular chapter in aluminum history is now drawing to a close.

NARRATIVE CHANGED

It’s hard to overstate the importance of China’s new need to import aluminum from the rest of the world.

The country’s seemingly endless construction of new smelting capacity has had a constant dampening effect on prices to the point that many Western foundries have collapsed over the past 20 years.

If China has now reached or near peak production, the biggest restriction on price increases is removed, which is why investment banks such as Goldman Sachs and Citi have turned structurally bullish on the price of China. aluminum.

There is also a political effect.

The rest of the world is rallying around the common need to tackle overcapacity in China’s steel and aluminum sectors.

A truce in the trade dispute between the United States and the European Union was reached last month with a joint pledge to “hold accountable countries like China that support trade-distorting policies.”

The two parties pledged to “find solutions before the end of the year which (…) will ensure the long-term viability of our steel and aluminum industries”. Read more

China had no incentive to engage with Western concerns when it built what it sees as strategic metal industries.

Today, however, Chinese policymakers are prioritizing decarbonisation, which means that energy efficiency and not production capacity is the new measure.

The policy change is already starting to impact production in the steel and aluminum sectors, and tensions will only intensify as China collectively prepares to meet President Xi’s target Jinping of maximum coal consumption by 2030.

It should be noted that China last month removed export tax rebates on 146 steel products. The aim is to fill any gaps in the internal market caused by the closure of inefficient steel plants.

It will also reduce the flow of exports that have caused so much trade tension everywhere else.

There has not yet been any mention of export rebates on aluminum products, but now could be a great time for Western countries to engage with China on its impact on the global aluminum market. aluminum.

Our standards: Thomson Reuters Trust Principles.



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