Overcapacity Drags on China Aluminum Prices


JANUARY 13, 2015

Aluminum ingots are piled up at a bonded storage area at the Dagang Terminal of Qingdao Port, in Qingdao, Shandong province on June 7, 2014. State-controlled aluminum maker Indonesia Asahan Alumunium (Inalum), is seeking $1.33 billion to help finance the construction of a smelter, power plant and expansion of its port, its chief said. (Reuters Photo/Fayen Wong)

Melbourne. Overcapacity in China’s beleaguered aluminium market will persist in coming months, weighing on local prices and boosting the appeal of shipping aluminium products overseas, traders and analysts said.

Increased product exports will help plug a supply deficit in the West, but will also fuel competition with Western producers. Exports from the world’s number one aluminium miner are already dragging on premiums — the cost of obtaining physical metal — in Asia.

“We certainly expect low [Chinese] prices to continue,” said Paul Adkins, managing director of Beijing-based consultancy AZ-China.

“What drives the Chinese aluminium industry is not market economics but debt. And for as long as you need to service debt, you’ll keep the plant running.”

Overcapacity has ballooned as local governments subsidize power costs for aluminium producers that are significant contributors to GDP.

AZ China estimates that more than half of China’s capacity is currently operating at a loss, even after the subsidies. It sees a domestic surplus of around 1-1.3 million tons this year.

Shanghai Futures Exchange (SHFE)  aluminium prices have hit a string of record lows already in January, falling to 12,685 yuan ($2,045) a ton on Tuesday, the lowest since 2005, and down more than 16 percent from mid-September.

Meanwhile, China’s exports of aluminium products grew about 19 percent last year, a trend analysts expect to continue in 2015, given low local prices compared to international markets.

China’s exports of unwrought aluminium and aluminium products, jumped 38 percent in December to 540,000 metric tons from 390,000 tons in November.

Primary aluminium attracts a 15 percent export tax in China, effectively shutting down exports, although semi-manufactured products such as rolled products receive a 13 percent rebate, helping make value-added exports profitable.

Aluminium shaped as continuous cast coils can be remelted at destination, becoming a substitute for primary material, noted Bank of America Merrill Lynch.

“We estimate that China’s token semi exports [i.e. semis that are being remelted] could reduce this year’s 1-million ton market deficit in World ex-China by up to 450,000 tons,” the bank said.

Meanwhile, a trader in Singapore said that some Indonesian buyers were importing Chinese coils and plates.