Aluminum Supply Side Reform to Cause Severe Deficit? Don’t Be Naive!

SHANGHAI, May 9 (SMM) – Aluminum supply side reform has been center of talk in China this year, and the market frenzy it triggered has fueled big gains in prices of the light metal.

How much impact will the reform actually have on market supply? Will the reform offer sustainable upward momentum to prices?

Currently, legal aluminum capacity already built is estimated at 40.54 million tonnes/year, including 29.87 million tonnes/year that meets Aluminum Industry Standard released by the MIIT. Another 10.67 million tonnes/year that has been filed at local governments but not filed at the MIIT, according to data from Asian Metal.  

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Aluminum capacity already built nationwide totals 44-44.7 million tonnes. That is to say, 3.5-4 million tonnes of aluminum capacity is illegal capacity, of which 25% has not entered operations and the rest 75% has been put online.  

Capacity closures will hurt smelters’ operations. Newly commissioned capacity in recent years has relatively small impact on environment. Government policy needs to be carried out smoothly. As such, it is estimated that the share of illegal aluminum capacity to be closed may not exceed 50% at the most. In other words, supply deficit will be a mere 400,000-600,000 tonnes at the most during Q2-Q4 this year, well below market had expected.

As a consequence, SHFE aluminum will surrender gains made earlier.  

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