Chinese Capacity Cuts: Could Aluminum Go Steel’s Way?

Capacity cuts

Cutting excess industrial capacity is China’s publicly stated policy. The country plans to shut down its polluting industries to address rising pollution as well as frictions with trading partners. Steel (X)(AKS)(MT), aluminum (AA) (CENX), and coal industries are among the key sectors where China has severe overcapacity. Notably, one of the factors that drove steel prices last year was expectations of supply-side reforms in China.

Chinese aluminum production

However, we’ve actually seen an increase in Chinese steel production over the last couple of quarters. Chinese steel production hit a new monthly record in April. To be sure, the increase in production is backed by decent end-user demand coupled with inventory restocking. However, amid expectations for softening demand and rising steel production, we’ve seen downward pressure on Chinese steel prices.

　　Market sentiment

Looking at aluminum, we see that China’s proposed capacity cuts helped boost market sentiment. However, China’s aluminum production data doesn’t really reflect any capacity cuts. China produced ~2.76 million metric tons of aluminum in April—a YoY (year-over-year) rise of 7.6%. The country’s aluminum production has risen 12.0% YoY in the first four months of 2017.

While steel prices have reacted to the supply and demand situation, aluminum prices are holding steady. One possible reason is aluminum’s diverse end usage making it less dependent on the construction sector. Having said that, if Chinese demand doesn’t keep up with surging production, we could see an increase in China’s aluminum exports that could pressure prices. Aluminum could also go steel’s way if we don’t see on-the-ground results from China’s much-publicized capacity cuts.

In the next part of this series, we’ll see why copper has outperformed aluminum so far in 2017.