Buy The Rumor, Sell The Fact in China Aluminum Market? SMM Exclusive

Published: Jan 25, 2017 11:19
Media has again speculated about aluminum capacity cuts in Hebei, Shandong, Shanxi and Henan under the title of China Plans to Cut Aluminum Capacities to Cope with Air Pollution.

SHANGHAI, Jan. 25 (SMM) – Media has again speculated about aluminum capacity cuts in Hebei, Shandong, Shanxi and Henan under the title of China Plans to Cut Aluminum Capacities to Cope with Air Pollution. The speculations were triggered by the release of Beijing-Tianjin-Hebei Air Pollution Prevention and Control Action Plan (Opinion Soliciting).

SMM, however, takes a different stance, with reasons as below.

SMM Interpretation of Surging SHFE Aluminum after Capacity Cut Rumor in Henan, Shandong and Shanxi

First, aluminum producers will face high production costs to produce in off-peak hours. It takes 750 yuan or above to stop and start in unit aluminum production, and costs will reach 2.25 billion yuan based on capacity cuts of 3 million tonnes in the four regions. Large aluminum producers may still have room to adjust themselves in the face of high costs, but small producers will have no other choice, but to exit, posing difficulties in carrying out the policy, which promotes to cut aluminum capacities by 30 percent during the winter heating season.

Aluminum Capacity in Shanxi, Hebei, Henan and Shandong     Unit: 10,000 mt

Region

Capacity Built 

Idled Capacity

Operational Capacity

Shanxi

104

4.5

99.5

Hebei

8

3

5

Henan

384

101

283

Shandong

1095

27

1068

Source: SMM

Second, aluminum producers are major taxpayers to one region's budget, and also largest single employers in the region. Take Shandong Weiqiao Pioneering Group as an example. The Group Shandong Weiqiao paid 8 billion yuan of taxes in 2016. Closing of small and medium aluminum producers will lay off a large number of workers, leaving a big employment issue to local governments.

Third, China’s aluminum capacities are now at 42.50 million mt, and operational capacities are 36 million mt, with utilization rates at around 84.7%. According to SMM data, newly-added aluminum capacities are estimated to exceed 5 million tonnes. So, low-cost capacities are expected to continue entering the market even if off-peak production policy is carried out during the 2017 winter heating season in the industry.

Fourth, the number of domestic aluminum producers has dropped from 150 to 80 over the past 6 years, but annual capacities have increased from 20 million mt to 42.50 million mt. Meanwhile, low-cost capacities are entering, while high-cost ones are leaving, and the trend is still going on.

Fifth, the annual growth of aluminum consumption is about 10%, and the growth is much higher than that of other nonferrous metals. Moreover, application of aluminum products is growing.

China’s aluminum industry is in a comparative supply surplus now, after comparing supply and consumption in absolute terms, SMM concludes. With capacity control policy gradually taking effect, China’s aluminum capacity growth has shown a sign of falling, but this could not exclude intermittent surplus. Investors are advised to taking cautious attitude towards risks exposed to overdone speculations on environment protection policy and capacity cuts, SMM adds.

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Data Source Statement: Except for publicly available information, all other data are processed by SMM based on publicly available information, market communication, and relying on SMM's internal database model. They are for reference only and do not constitute decision-making recommendations.

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Buy The Rumor, Sell The Fact in China Aluminum Market? SMM Exclusive - Shanghai Metals Market (SMM)