Industry Info

Parallel aluminium universes move further apart

Global aluminium production rose by an annualised 454,000 tonnes to 46.93 million tonnes in September, according to figures out this morning from the International Aluminium Institute (IAI). The headline jump in output masks two very different trends in China and the rest of the world. In China the national run rate surged by 670,000 tonnes annualised last month to a fresh all-time high of 22.61 million tonnes.

Production in the rest of the world fell for the third month running with the downtrend becoming more pronounced as capacity curtailments start to bite. Aluminium's parallel universes, to quote a phrase coined by Klaus Kleinfeld, chairman and chief executive of US producer Alcoa, are moving ever further apart, it seems.

There is currently little tension between these divergent production trends with China doing its thing and the rest of the world doing its. But that is not to say that this stability is durable. The parallel universe that is China is not quite as separate from the rest of the world as Alcoa and other non-Chinese producers would like to believe.

CHINA BOOM China's annualised production of aluminium rose by 1.86 million tonnes over the first nine months of this year, according to figures supplied to the IAI by the China Nonferrous Metals Industry Association (CNMIA). Actual output rose by just over 10 percent to 16.10 million tonnes in the January-September period. It's easy to forget that parts of China's aluminium smelter sector are as margin-compressed as their Western counterparts.

National champion Chalco, for instance, closed 380,000 tonnes of capacity in the first half of this year, a move that didn't prevent the company notching up a first-half net loss of 623.8 million yuan ($101.9 million). Others are being supported by local governments, most commonly in the form of power subsidies. Beijing, meanwhile, is once again trying to force out older capacity, but with the danger that threatened producers will upgrade and expand rather than close. This has been the outcome of previous clamp-downs on the sector.

All the while new capacity is coming on stream and ramping up in China's north-west, most particularly Xinjiang province. The Ministry of Industry and Information Technology estimates that some 10 million tonnes of capacity is currently being built with at least 1.3 million tonnes of that due to start up in Xinjiang over the second half of this year.

Indeed, it is quite possible that the CNMIA figures are underestimating Chinese production right now. It's noticeable that the IAI includes a figure of 200,000 tonnes each month for potentially unreeported output in the country The contrast with the rest of the world is becoming ever more stark. Outside of China aluminium production has been trending lower since April.

Annualised production of 24.31 million tonnes in September was 620,500 tonnes lower than at the end of last year. Moreover, the downtrend is accelerating, annualised run-rates dropping by 220,000 tonnes in September itself, and still has further to run. Cutbacks announced since the start of this year now total 1.2 million tonnes with Russian giant United Company Rusal last week detailing more drastic curtailments than previously expected.

Through a combination of mothballing some plants and reducing amperage at others, the company now plans to take around 648,000 tonnes offline, equivalent to 15 percent of group production in 2012. Elsewhere, US producer Ormet has thrown in the towel, announcing a full immediate cessation of operations, which actually means closing the last two operating lines with capacity of 90,000 tonnes per year.

Equally significant to short-term production trends is the unplanned outage at the new 740,000-tonne per year Ma'aden smelter in Saudi Arabia. The first potline has been taken out of action due to "pot instability" and is only expected to return some time between the first and second quarters of next year.

The second potline was in the process of being ramped up and will now be accelerated, according to Alcoa, which has a 25-percent stake in what will eventually be a fully integrated facility. The company is being a bit coy on production impact but full capacity operation, originally expected next year, is likely to be deferred.

The rest of the world, meanwhile, also has the problem of large stocks overhang resulting from the 2008-2009 financial crisis. Only sustained supply-side discipline will help erode this legacy mountain. China, of course, may well have its own stocks mountain but a significant part is on the state's balance sheet thanks to the State Reserves Bureau repeatedly hovering up surplus metal from preferred operators such as Chalco.

Producers elsewhere have no such state cushion, although Rusal is currently lobbying the Russian government to set up its own "strategic" reserve. China and the rest of the world barely interact at a primary metal level, hence Kleinfeld's analogy with parallel universes. The country is a net importer, albeit a highly marginal one. September imports perked up to 54,000 tonnes, the highest level this year. But cumulative net imports over the first nine months of 2013 were just 130,000 tonnes, a negligible amount in a 23-million tonne market.

Source: Reuters, Recorder