LONDON, (Reuters) – Global aluminium production contracted in China and the rest of the world in January. The world’s smelters turned out 5.30 million tonnes of aluminium last month, down 1.1 percent on January 2018 and the lowest count since November 2017. The month-on-month slide was particularly dramatic, equivalent to an annualised decline in global output of 2.3 million tonnes. Most of that was down to China, the world’s dominant producer, where output plunged by an annualised two million tonnes between December and January. The statistical history of Chinese aluminium production is littered with such startling monthly volatility but the International Aluminium Institute (IAI), which compiles these figures, now uses multiple sources to try and smooth out past irregularity. Moreover, there has been accumulating evidence that Chinese producers are struggling in the face of weak demand and low prices. Unfortunately for producers everywhere else, part of the evidence comes in the form of accelerating Chinese exports.This export surge, coupled with equally bombed-out pricing on the London market, is forcing more smelter closures. Production outside of China registered its steepest month-on-month fall since April 2017. China’s aluminium production dynamics can be a bewildering interplay of environmental constraints, structural reform and price. There has been no repeat of last year’s blanket curtailments of aluminium capacity in this “winter heating season”. But capacity has been taken off-line to reduce emissions nevertheless. Hongqiao Group, the world’s largest aluminium producer, announced on Feb. 1 it was reactivating capacity closed over the prior two months by order of the local authorities in the city of Binzhou. Some of the company’s idled capacity elsewhere will have to wait until mid-March to start the refiring process.
Such environmental constraints are going to remain in force until Beijing starts winning its self-declared war on smog. Relative to the winter closures, however, the biggest impact on China’s aluminium production sector has come from low prices. Chinese research house Antaike has estimated that 3.2 million tonnes of capacity was closed last year, 80 percent of it in the second half as Shanghai prices fell. A December commitment by some of the country’s biggest producers to cut output by 800,000 tonnes might be a nebulous target but it’s a clear signal of the margin pain being experienced by some. If the meeting was intended to send a message to the market, it didn’t work. Shanghai prices have carried on sliding, last trading at 13,625 yuan ($2,028) per tonne, just above January’s three-year low of 13,275 yuan. Chinese producers have been here before, when the Shanghai aluminium price slumped to within touching distance of the 10,000 yuan level in 2015. That only briefly halted the Chinese aluminium juggernaut. This time, though, there is an incentive for producers to permanently close under-performing plants. Beijing’s ongoing structural reform of its sprawling aluminium sector has translated into a cap on new capacity. If you want to build a new smelter in China now, you must offset it against the closure of another of equal size. This has generated a fledgling market in capacity permits, evidenced by Chalco’s proposal to sell 190,000 tonnes of capacity from one partly-closed plant in Shanxi to a sister company building a new plant in Yunnan province. This is part of a broader migration of aluminium smelting from northern higher-cost, more polluted provinces to the south of China. On paper what’s closed will be replaced, but the process could be anything but smooth as weak market economics drive a front-loading of closures to free up capacity permits. Perhaps the clearest evidence of the pressures on producers in China is the step-up in exports of semi-manufactured products, the traditional escape valve for domestic market surplus. January’s export flow of 552,000 tonnes in January represented year-on-year growth of 26 percent. The rest of the world is in the curious position of both needing this metal to plug a deficit of metal outside of China but resenting it for depressing prices. London Metal Exchange aluminium hit a two-year low of $1,785.50 at the start of January and the price has struggled to make much headway since, trading on Friday morning around the $1,915 level.
The resulting margin pressure continues to take its toll on smelters. Western European production fell by 5 percent year on year in January and daily average production has fallen through the 10,000-tonne level for the first time since 2014. That likely reflects the planned closure on economic grounds of two Spanish smelters by Alcoa. Aviles and La Coruna have a combined capacity of 180,000 tonnes but have been running at 56,000 tonnes less than that over the last couple of years. Meanwhile, production in both the IAI’s North American and Latin American categories remains constrained by two outages. While U.S. production is rising, that in Canada continues to be dragged down by a year-long union lock-out at the Becancour smelter. Becancour’s production slid from 438,000 tonnes in 2017 to 136,000 tonnes last year, when it was operating one of its three potlines. Alcoa, which manages the plant, said in December it was also curtailing half of the remaining 138,000-tonne-per-year line. Latin American output continues to slide due to the closure of half of Hydro’s 450,000-tonne-per-year Albras smelter in Brazil. The return of the idled capacity is dependent on the return to full capacity of Hydro’s Alunorte alumina plant which feeds Albras. Alunorte’s return is itself dependent on a court sign-off on an environmental dispute, something which seemed a foregone conclusion until the Brumadinho tailings dam disaster. This mix of closures and outages caused production outside China to fall by 1.5 percent year on year in January with average daily production of 70,480 tonnes the lowest since August 2017. A return by either Albras or Becancour could provide some future lift, while the restart of idled U.S capacity and Aluminium Bahrain’s new 540,000-tonne-per-year Potline 6 will exert greater influence over run-rates as they build momentum over the coming months. But make no mistake, the business of making aluminium is still super tough. And that increasingly applies to China just as much as it does to the rest of the world.
