(The opinions expressed here are those of the author, a
columnist for Reuters)
* China's primary aluminium production: https://tmsnrt.rs/3oHvyuX
LONDON, Oct 30 (Reuters) - Another month, another Chinese
aluminium production record.
China's giant smelter sector churned out an average 105,000
tonnes per day in September, according to the International
Aluminium Institute, with year-to-date production up 3.3% on
More records will be broken in the months ahead.
China's smelters are capitalising on strong margins
as demand rebounds and government stimulus flows into
infrastructure and construction.
Such is the history of the aluminium market over the past
decade. China's excess capacity, periods of over-production and
high-volume exports have kept a lid on prices in the rest of the
But is the Chinese aluminium juggernaut running out of road?
HITTING THE CEILING
Goldman Sachs thinks so.
"There is little doubt in our view that the age of
structural oversupply in China's aluminium market, driven by
overcapacity in the smelting sector, is now behind us," the
bank's analysts said in an Oct. 27 research note.
Citi turned bullish on aluminium in August for the same
The old era of aluminium, characterised by seemingly
infinite Chinese smelter capacity expansion, multi-year
surpluses and high inventories is coming to an end, Citi said.
The bank said it believes a new era of aluminium is coming,
founded on a slowdown of capacity additions and enhanced supply
discipline ("A New Era of Aluminium", Aug. 2, 2020).
It's still something of a heretical view, with Citi
admitting "we continue to hear pushback on our medium-term
bullish view", but a significant moment is undoubtedly
Beijing has been giving the aluminium smelter sector the
structural reform treatment since 2016. National capacity has
been capped at 45 million tonnes a year and the authorities have
kept a tight grip on new smelter construction, only allowing it
as an offset against the closure of old capacity.
That ceiling is now very close to being reached.
Actual production was running at an annualised rate of more
than 38 million tonnes last month and notional capacity is set
to hit or exceed the cap by 2022, the two banks agree.
There may be some wriggle room for special-status projects
and there is still some so-called illegal capacity left over
from a clearout of unauthorised operators in the early stages of
the sector's reform programme.
But after one last lift over the next 12 months, both Citi
and Goldman are looking for the aluminium smelter juggernaut to
grind to a halt.
What happens then?
Might the government change its mind and relax the capacity
cap? It's possible, but a major restraining influence will be
President Xi Jinping's commitment to carbon neutrality by 2060.
The country's aluminium sector is heavily coal-dependent for
There has been a sizeable migration down to Yunnan province
with its hydro resources. Yunnan's smelter capacity has surged
from 1.5 million to 4.1 million tonnes a year in the space of
three years, but the province is running out of energy space and
there isn't an obvious clean-power alternative, according to
Eoin Dinsmore, aluminium research manager at research house CRU,
speaking at last week's virtual LME Seminar.
Coal will remain the dominant power source everywhere else,
which leaves the smelter sector facing considerable uncertainty
as Beijing faces up to the trade-offs between its past
commitment to industrial prowess and its future decarbonisation
While China's primary metal producers are heading for the
capacity wall, the country's demand profile is expected to
remain strong as the metal benefits from rising usage in
construction and green infrastructure as well as recovering
Chinese capacity to produce semi-fabricated products such as
foil, tube and plate has continued growing even while that of
primary metal has been constrained.
Investing downstream has come with the added benefit that
the product can, if necessary, be exported with a
It is exports of these "semis" that have displaced demand
for primary metal in the rest of the world and generated a
lengthening list of anti-dumping complaints and sanctions.
Underpinning Citi and Goldman's shared bull view is a
projection that the country may be approaching the point where
it will not be able to produce enough primary metal to meet
ever-growing demand from its fabrication base.
It may already be happening.
China's imports of primary aluminium have surged this year,
flipping the country to net importer of the metal in all forms
in July and August for the first time since the financial crisis
An arbitrage window opened this year between an exuberant
recovery-mode Shanghai market and a lagging international price.
China was a net exporter again in September, but only
marginally so with inflows of primary metal remaining strong.
Goldman analysts argue that rather than being a one-off,
periodic primary import phases into China, supported by open
arbitrage, will be a continued influence on physical market
Physical traders seem to agree with surplus metal
gravitating towards Asian locations where it can be easily
shipped to China.
"We have noted significant reductions in aluminium exports
from Russia, Middle East and India to Europe this year, and a
significant increase from those countries to Asia," Goldman
London Metal Exchange (LME) warehouses in Malaysia's Port
Klang and Johor currently hold 936,000 tonnes of registered
aluminium, accounting for 64% of total stocks.
Asian locations also held 1.1 million tonnes of LME shadow
stocks at the end of August, representing 80% of total
reportable, but not warranted, metal.
Compare and contrast with the last crisis of oversupply,
when metal accumulated first in Detroit and then the Dutch port
of Vlissingen over the early 2010s.
The global inventory axis has tilted eastwards in the last
year or so and it has done so as the physical market anticipates
periods of supply-demand mismatch in the domestic Chinese
Those were fleeting in the past because there was a
seemingly endless pipeline of new smelters ready to fire into
That old era looks to be drawing to a close, however, even
if many are still hesitant to proclaim the dawn of a new one.
(Editing by David Goodman)