Aluminum surges as winter comes early for Chinese smelters
Mr Andy Home wrote for Reuters that Christmas has come early for aluminum bulls. In London the price of aluminum for three-months delivery hit a five-year high of USD 2,199.00 per tonne on Thursday. In Shanghai the most active contract went one better, hitting a six-year high of CNY 17,250 per tonne. Speculators are piling into both markets. Market open interest on the Shanghai Futures Exchange aluminum contract is currently at an all-time high of 1.09 million contracts with volumes elevated since the middle of August.
Well, it’s not exactly Christmas, but in China winter has come early with the first aluminum smelters now powering down ahead of the mandated cuts over the “winter heating season”. China’s “Air Pollution Control” regulation, formally approved in February, requires industrial sectors in the four provinces around Beijing to cut output over the November-March period. The winter cuts are part and parcel of Beijing’s war on smog, which can be particularly acute over the winter months.
In the case of aluminum, smelters, alumina refineries and anode plants will all be affected to varying degrees. Smelters and alumina refineries are mandated to take cuts of at least 30 percent, implying a collective metal production hit in excess of a million tonnes. At least a couple of aluminum operators have started powering down early in Jiaozuo city in the province of Henan, according to local industry website SMM, citing a notice from the municipal environmental protection office. Chalco’s Zhongzhou alumina refinery and the Jiaozuo Wanfang smelter are the names in the frame. Details remain frustratingly sketchy but there are already rumors of more plants taking early action in coordination with environmental authorities.
There are two key points here.
First, the winter cuts are actually going to happen. Despite the clear statement of intent by Beijing policy-makers, there was a good degree of market scepticism as to whether they would.
These winter restrictions represent a second wave of curtailments after Beijing’s drive to close “illegal” aluminum capacity over the last few months.
Second, this whole process is going to be characterized by a lack of transparency with rumors and speculation proliferating in the absence of official confirmation.
Given the lack of visibility on what is happening in key aluminum provinces, it’s natural for the market to fall back on the “hard” national production figures.
These come from the China Nonferrous Metals Industry Association (CNIA) and are transmitted by the International Aluminium Institute (IAI) as part of its global monthly production report.
The latest figures for August look encouraging for aluminum bulls. China’s national output was 2.64 million tonnes last month, the lowest headline figure since February and, expressed as average production per day, the lowest run rate since March last year.
Indeed, Chinese production growth turned negative in August for the first time in over a year.
Here, it seems, is the statistical evidence that China’s giant aluminum machine was already slowing due to the closure of “illegal” capacity.
Now, with smelters starting to shutter lines early ahead of the winter heating season, it can only fall further, right?
Just one thing, though. What if the official figures are wrong?
Source : Reuters