Aluminum Smelter Capacity in China

Underlining the chaotic state of both the Chinese planning regulations and the authorities’ visibility on the actual state of the domestic aluminum smelter market, a recent Reuters article reports on various sources of information to give a patchy, but no less alarming, picture of the state of the industry. Apparently, Su Bo, an industry official, stated this week that China had decided to halt plans to build new aluminum plants, due to serious over-capacity in the industry. What was not clear: whether this would impact all plants, even those under construction, or those approved and financed but where construction had not started or just those for which new applications were to be made.

A newspaper report stated some $11 billion of projects are in the planning stage. As Heng Kun, a senior metals industry analyst at Essence Securities is quoted as saying, “it would not be easy for the authorities to halt capacity under construction and supported by bank loans as stoppages could result in bad debt for banks.” As if to underline the sheer scale of the Chinese smelter market buildup, he estimated that a phenomenal 4 million tons of capacity is currently under construction and another 3 millions tons is planned but not yet commenced. Compare that to the huge industry coverage one 750k-ton plant gets in the Middle East; China is quietly building more than five times that amount.

As if that were not bad enough, and underlining the uncertainty of the data, Hu Zhang Ping, chief of the aluminum division at the China Non-ferrous Metals Industry Association, and an adviser of metals policies to the central government, is quoted as saying that in the northwest province of Xinjiang, over 10 million tons of capacity was planned with one million tons currently under construction. Hu expected capacity to rise 14 percent this year to 25 million tons and on current plans would be 30 million tons by 2015.

Even capacity utilization data is unclear, with conflicting advice coming from apparently reliable sources. The China Nonferrous Metals Industry Association said the industry produced 17.8 million tons of aluminum on 21 million tons of capacity in 2010, indicating a capacity utilization rate of nearly 85%, but a recent report by the State Council, quoted in the article, said that the capacity utilization rate was only 60%. They can’t both be right.

As the article says, an obsolete and less efficient plant is being phased out, but this appears unlikely to exceed 700,000 tons this year and as we have seen before, at least a proportion will be retro-upgraded to improve efficiencies and extend the plant life. While smelters are making money at well above cash costs, only decisive government action will stop them, action that for all Beijing’s strong words has been absent up until now. Why should we care? Because although primary ingot is largely prevented from being exported by prohibitive export taxes, a substantial fall in the domestic ingot price caused by a glut of metal supply would impact prices on the LME. Furthermore, if the SHFE was to trade at a discount to the LME downstream semi-finished producers of extrusions, sheets and plates would have access to metal at prices below their competitors in the west, allowing the current trickle of semi exports to turn into a flood.