Aluminum Shines As China Proposes 30% Capacity Cut In Key Production Areas

We are likely to see a tight aluminum market in 2017 and 2018. Deutsche sees excess demand.

Deutsche Bank

Aluminum has staged a nice comeback, thanks to China’s supply side reform. Aluminum closed 1.3% higher at $1,949 per ton on Wednesday, 35% higher than the trough seen in late 2015.

As part of its efforts to control pollution in northern China, Beijing has proposed cuts to aluminum and alumina capacity by 30% and 50%, respectively, in “Beijing, Tianjin, Hebei, and surrounding areas”. This measure is not likely to be implemented until this November however.

These are the key aluminum and alumina production areas. Deutsche Bank‘s Grant Sporre has the numbers:

If the plan were to go ahead in its current form, smelting capacity in Shandong, Henan, Shanxi, and Hebei of 11Mt, 3.8Mt, 1Mt, and 0.1Mt, respectively, accounting for c.37% of China’s total primary aluminum capacity would be affected. Alumina capacity in these four provinces makes up c.78% of China’s total, with 23.5Mt, 12.6Mt, and 20Mt in Shandong, Henan, and Shanxi, respectively. If the proposal were implemented for the entire heating season (mid-Nov to mid-Mar, four months), total aluminum production in China would decrease by c.1.5Mt, accounting for roughly 4%+ of annual production. Meanwhile, alumina production would decrease by c.9Mt, representing c.15% of total China alumina output in 2016.

Wow!

According to Deutsche Bank, the aluminum industry could see excess demand this year and next; therefore, aluminum’s price can hover above $1,850 per ton. The bank raised its 2017 and 2018 price forecast by 7.5%.

China’s public-private partnership, mainly used for infrastructure projects, can boost demand for aluminum over the next year. Deutsche forecasts global demand for aluminum to accelerate from 4.4% in 2016 to 5.5% this year. Demand in China will grow to 8% in 2017, versus 6.7% in 2015.

On the supply side, “the Chinese aluminium industry has ‘self regulated’ with significant cuts in Q4’15 being the catalyst to the price recovery in 2016.” In addition, pollution control could dent China’s supply further. As such, Deutsche estimates global supply to grow by 5.5% this year, slower than demand growth. China’s supply will grow 6.5% this year, also slower than demand there.

This morning, Aluminum Corp. of China (2600.Hong Kong/ACH) soared 3.4%, while Australia’s Alumina (AWC.Australia) rallied 8.6%. Overnight, Alcoa (AA) soared 9.8%.

Yesterday, the world’s largest aluminum producer China Hongqiao (1378.Hong Kong) tumbled more than 8% before entering a trading halt after Emerson Analytics issued a short report alleging the company overstated its profit margins. China Hongqiao said it would respond to Emerson’s allegations. It’d better get its act together and resume trading quickly to short squeeze Emerson, before this rally evaporates.