{"id":61690,"date":"2013-04-18T13:30:51","date_gmt":"2013-04-18T03:30:51","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2013\/04\/18\/chinas-transformation-of-the-aluminium-industry\/"},"modified":"2013-04-18T13:30:51","modified_gmt":"2013-04-18T03:30:51","slug":"chinas-transformation-of-the-aluminium-industry","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2013\/04\/18\/chinas-transformation-of-the-aluminium-industry\/","title":{"rendered":"China’s Transformation Of The Aluminium Industry"},"content":{"rendered":"

\n\t-China growing aluminium<\/span> capacity
\n\t-Vast coal resources to power smelters
\n\t-Plans will transform global industry
\n\t-Price pressures to continue<\/strong>
\n\t <\/p>\n

\n\tBy Eva Brocklehurst<\/span><\/p>\n

\n\tDeep in north-western China lies a region where there is 1.16 trillion tonnes<\/span> of very cheap thermal coal. China is planning to use this coal to power and develop a significant aluminium<\/span> production capacity. Commonwealth Bank analysts have been there and seen the plans. The Chinese are drawing on additional high quality bauxite reserves in Shanxi<\/span> province. The new domestic alumina capacity threatens local marginal cost producers in Shandong<\/span> as well as pressuring seaborne alumina pricing.<\/p>\n

\n\tChina's plans in Xinjiang<\/span> province are likely to transform the global aluminium<\/span> and alumina industries, the analysts maintain. The province's aluminium<\/span> capacity is expected to grow from 1.5 million tonnes<\/span> per annum at the end of 2012 to 8-12mtpa<\/span> by 2020 and could be up to 30mtpa<\/span> should demand warrant. These are big quantities but other smelters globally are not expected to give up and let Xinjiang<\/span> take over. The analysts note that, despite losses, these smelters are benefiting from tax concessions, power subsidies and other support and stay waiting for better times.<\/p>\n

\n\tMoreover, inventory financing will continue as long as the market is in excess supply and this looks likely for the rest of the decade, in the analysts' opinion. They highlight the fact that, because smelters face high costs in curtailment, they tend to tolerate cash losses for longer than otherwise would be the case. Also, aluminium<\/span> is a light metal and is produced in significant volumes compared with other metals. Not only does it provide more tonnage for investors to enter finance trades, the rent required for the extra physical space gives warehouses an incentive to keep the financing trade going. This is highlighted by the fact that the costly nature of aluminium<\/span> production lends itself to a more fixed, short-run supply and therefore there's greater need for warehousing to smooth over variations in demand.<\/p>\n

\n\tThe analysts found out that Shanxi<\/span> province has one billion tonnes<\/span> of bauxite reserves which is underpinning the strong growth in alumina capacity. This is supported by new technology, better quality bauxite and lower energy costs. This translates to 333-400m<\/span> tonnes<\/span> of alumina or 167-200m<\/span> tonnes<\/span> of aluminium<\/span>. Additional alumina capacity of 3.7m tonnes<\/span> was installed in Shanxi<\/span> in 2012 with another 6.6mt committed to over the next two years. The analysts suspect the alumina supply growth in Shanxi<\/span> will displace around 75% of the high-cost supply from Shandong<\/span>. Shandong<\/span> is the world's marginal alumina producer and sets the price, relying largely on imported bauxite from Indonesia. Hence, the analysts see that role diminishing in favour<\/span> the new capacity in Shanxi<\/span>. Directives to reduce bauxite import dependence should see more aluminium<\/span> units coming from Indonesia as alumina and not bauxite.<\/p>\n

\n\tThe analysts do not see China becoming a structural importer of aluminium<\/span> any time during the next decade. Key to this is the level of the Shanghai-LME<\/span> price arbitrage. The more attractive this is, the more likely China will import aluminium<\/span> on an opportunistic basis. Closure of small, inefficient smelters and expansion of highly efficient smelters should shift China's aluminium<\/span> costs down the global cost curve. The new cheaper production is not only capable of replacing lost capacity but of increasing aluminium<\/span> output to grow in line with domestic consumption. While the government had previously discouraged strategic aluminum exports because of scarce energy, the abundant thermal coal in Xinjiang<\/span> puts this in doubt, in the analysts view. They suspect China will opportunistically export aluminium<\/span>. <\/p>\n

\n\tChina's alumina refiners, especially Shandong<\/span>, are price sensitive and the analysts maintain they will ration output when product and input prices move against them. Since August 2011 international prices were more attractive than the domestic alumina price and China imported the product, despite having sufficient domestic capacity. Recently, in February 2013, Australian alumina prices were US$18.76 per tonne<\/span> more attractive than domestic Chinese prices but, accounting for seaborne freight and port handling, this advantage is negated.<\/p>\n

\n\tInterestingly, the Indonesian ban on exports of bauxite should have seen Chinese imports of Australian and Indian bauxite step up over the last six to 12 months but the analysts find the data does not support this. Moreover, no one they spoke to on the trip was concerned over the security of bauxite supply. There's another frame to the Indonesian ban. Indonesian officials offered Chinese alumina refiners the option that, if they committed to build refineries in Indonesia, they could export bauxite to Chinese operations until their refineries were completely operational.<\/p>\n

\n\tThe ramifications of such large, new low cost smelting capacity on medium term alumina and aluminium<\/span> prices is material. The analysts have reduced forecasts for aluminium<\/span> by 1% in FY13<\/span>, 10% in FY14<\/span> and 15% in FY15<\/span>. They reduced the long run expected price by 24% to around US88c<\/span> per pound in 2020. For alumina, price expectations have been reduced 2% for FY13<\/span>, 15% for FY14<\/span> and 19% for FY14<\/span> and the long run real price reduced 25% to US$310\/t in 2020.
\n\t <\/p>\n

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Commonwealth Bank analysts take a look at the vast cheap coal resources which are key to the significant growth in Chinese aluminium capacity.<\/p>\n","protected":false},"author":17,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[23],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/61690"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/17"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=61690"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/61690\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=61690"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=61690"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=61690"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}