Surge in Chinese exports bodes ill for aluminium prices

Global aluminium fundamentals would have been in a much better state had the Chinese industry exercised the same kind of production discipline as was seen in other regions, especially Europe and America. Of the global aluminium production of 53.746 million tonnes (mt) in 2014, China alone accounted for 27.98 mt. On a quarter-on-quarter basis, aluminium capacity use in China ranged from 82 per cent to 84 per cent, several percentage points higher than in other countries.

That there hasn't been any capacity decommissioning in China isn't true. Many believe under pressure from the Xi Jinping-led government, high-cost and polluting smelters with a combined capacity of 2.1 mt have stopped production permanently. Another 1.5 mt of capacity is due to be scrapped. Some Chinese aluminium producers are under increasing pressure from banks, which are unwilling to roll over any more loans. They, too, are likely to go out of business, especially as the metal is again down, following the World Bank estimating low global growth of three per cent this year. Growth will be low because most developed countries are still grappling with effects of the 2008 global financial crisis. The only exceptions are the US and the UK. The Chinese economy, as the World Bank points out, is undergoing a carefully managed slowdown, which is hurting demand for all metals.

Aluminium production in China continues to rise, as new supply is offsetting any impact of inefficient and energy-guzzling smelters being shut. This is a concern for global industry. At the same time, aluminium groups such as Alcoa of the US, which has shut about a third of its primary aluminium capacity since 2007 (Portovesme in Italy is the latest in the roster marked for closure), see redemption in tight production discipline. Rusal, the world's largest aluminium entity, cut production eight per cent to 3.9 mt in 2013; last year, the company did away with another 325,000 tonnes of smelting capacity. Other major producers such as Hydro of Norway are doing two things simultaneously -- relieving themselves of high-cost capacity and aggressively cutting costs in the production chain. The average aluminium price in the final quarter of 2014 created the grounds for restarting some smelters regarded as classical 'swing' producers. This year, Gulf Cooperation Countries (GCC) will raise production to five mt, putting pressure on prices. The saving grace is about 40 per cent of GCC production of primary aluminium is value-added into semis locally.

Consulting and research group CRU has estimated a three-month London Metal Exchange (LME) primary aluminium average price of $1,950 a tonne for the first quarter of this year, as "investors reduce bullish bets on concerns over global consumption growth, smelter restarts outside China and Chinese primary and semis exports". At this point, this looks unlikely. As was the case with steel - by way of marginal mixing of boron, Chinese shippers had passed on primary steel as alloy steel to avoid paying export tax - aluminium producers in that country are adopting similar tactics. Burdened with surplus production and sitting on fairly large inventory, Chinese aluminium groups are said to be hoodwinking the customs authorities routinely by shipping plain-vanilla primary metal as semi-finished rolled products and extrusions. But is it possible to go on pulling wool over the eyes of customs officials for long? There are strong reasons to suspect they are hand-in-glove with exporters.

The reason why Chinese exporters are resorting to mis-declaration and managing to get away with it is because primary aluminium attracts a 15 per cent export tax. Other incentives are a 13 per cent value-added tax rebate on exports and favourable terms of credit. It is expected Beijing will soon do away with the export levy on primary aluminium exports. Once this happens, there will be a surge in Chinese exports and LME prices will come under pressure. "China has been aggressive in building aluminium smelting capacity in the past decade, despite a lingering issue with bauxite supply. This also holds good for most other metals, giving China the status of a leviathan. So, its policy moves will necessarily have a major bearing on world metal prices," says National Aluminium Company Chairman Ansuman Das.

MARKET DISRUPTION

• Of the global aluminium production of 53.746 mt in 2014, China accounted for 27.98 mt
   
• High-cost and polluting Chinese smelters with a combined capacity of 2.1 mt have stopped production
   
• CRU estimated a three-month LME primary aluminium average price of $1,950 a tonne for the first quarter of this year
   
• Chinese exporters are resorting to mis-declaration because primary aluminium attracts a 15% export tax
   
• If Beijing does away with the export levy, there will be a surge in Chinese exports and LME prices will come under pressure