How Worried Is Alcoa about China’s January Aluminum Production?

China’s January aluminum production

According to the data released by the International Aluminum Institute, China produced ~2.95 million metric tons of aluminum in January, which represents a YoY increase of almost 19%. In absolute terms, this is the highest monthly production in China.

We should remember that China’s overproduction has been one of the key issues plaguing global aluminum markets. There were concerns that some of the idled aluminum capacity could come online in China in the second half of 2016. Notably, we did see some increases in Chinese aluminum production in 4Q16 after a decline in the previous months.

What it means

The big surge in China’s January aluminum production sounds worrisome for primary producers (RIO) (NHYDY), including Alcoa (AA) and Century Aluminum (CENX). The rising trend in aluminum production suggests that market fears of possible restarts of Chinese smelters have come true.

One would also have expected a slight moderation in Chinese aluminum production last month due to the early Lunar New Year holiday. Remember, the Chinese New Year began on January 28, 2017, while it started on February 8 in 2016.

What to look forward to?

Faced with smog in major cities, China is clamping down on polluting industries. With its high energy intensity and reliance on coal, aluminum could be in the forefront if Chinese government indeed acts against polluting industries.

According to China, the country closed down some of its excess steel capacity last year, though Greenpeace says that the country’s production capacity actually went up last year.

It could be too early to comment if we’ll see any permanent curtailment in Chinese smelting capacity. It’s also worth noting that China (FXI) also continues to add new smelting capacity most of which is expected to be environmentally friendlier and more cost efficient than old smelters.