March 4, 2018 / 11:44 PM / 4 months ago

As winter curbs end, China's aluminum smelters face new reckoning

BEIJING (Reuters) - Some Chinese aluminum producers that shut smelters during a winter crackdown on pollution may not reopen this spring once output curbs are lifted, as planned new capacity by state-run companies threatens to overwhelm demand and cut into profits.

FILE PHOTO: An employee looks at an aluminium foil roll being lifted at a plant in Binzhou, Shandong province, China May 16, 2017. REUTERS/Stringer/File Photo

China, the world’s biggest producer of aluminum - used in aeroplanes, cars and beverage cans - ordered smelters in 28 of its smoggiest northern cities to cut output by 30 percent from mid-November to mid-March. That affected an estimated one million tonnes of annual output.

Record stockpiles and weak aluminum prices, which are down almost 10 percent since mid-November and hovering near breakeven levels, have given smelters from Shandong to Shanxi pause as the end of winter approaches. But they also face extra competition from new, mostly state-owned smelters in regions not subject to output curbs.

Some 3 million-4 million tonnes of new capacity is set to come on line this year, or about 10 percent of the country’s current output, according to a survey of analysts.

That’s roughly equivalent to adding the production capacity of Russia’s Rusal (0486.HK), the world’s second-biggest aluminum producer, to a bloated Chinese market whose overcapacity has riled the United States.

That means squeezing out small, private companies.

China’s state-owned producers “are going to become bigger and bigger and probably more powerful in the industry,” said Jackie Wang, an analyst at CRU, a commodities consultancy.

A limited restart may boost Chinese efforts to eliminate excess capacity via supply-side reform, which will be one of the main themes of the annual meeting of the National People’s Congress, China’s parliament, which starts Monday.

But the new capacity, which far exceeds the amount cut over the winter, is also likely to send shivers across the global market and add pressure to international prices.

(China's aluminum market: reut.rs/2Fju6eq)

(China's aluminum output: reut.rs/2Fglwgv)

BREAKEVEN

Overseas alumina traders report a dearth of buying from Chinese smelters this year, suggesting no major restocking drive is underway.

A source at a medium-sized smelter in Henan province said his company will “not necessarily” switch its units back on. Doing so depends on whether the local government will sanction such a move, the source said, adding that the restarting process is lengthy. It is also expensive, analysts say.

Most Chinese smelters lose money when prices are as low as 14,000 yuan ($2,206) per tonne and will have to assess whether restarting is worthwhile, Wen Xianjun, vice president of the China Nonferrous Metals Industry Association, told Reuters.

“Unless you see a drastic decrease in the coal price and the anode price, their margins are not coming back, so there’s not a lot of reason to restart,” said Victor You, an analyst at CLSA, referring to carbon anode, used to conduct electricity in the smelting process.

Not everyone is so cautious.

A source at Xinfa Group, China’s second-biggest private smelter, said it would restore full production in Shandong from March 15 after cutting around 380,000 tonnes for winter.

At 14,000 yuan a tonne, “we can still have enough to eat,” the source said, but added: “maybe others will go hungry”. Xinfa did not respond to a request for comment.

STATE-RUN SMELTERS REAP REWARDS

Paul Adkins, managing director of the consultancy AZ China, estimated that 4.4 million tonnes of new capacity would be completed this year, most from state-run companies. Aluminum prices and power costs may limit the increase to 3 million tonnes, he told a Reuters global metals forum last month.

State-run companies expanding production include Aluminum Corp of China Ltd (601600.SS), known as Chalco. The company said last year that it would boost output in 2018 as it brought on new capacity but did not disclose the size of the increase.

Yunnan Aluminum (000807.SZ) is also due to build plants in its home province and Baise Mining Group is adding new capacity in Guangxi. The companies did not respond to requests for comment.

There were already signs of a ramp-up in December, when China’s aluminum output defied the winter cuts to reach its highest since June.

CRU’s Wang, who expects 2.8 million tonnes of new capacity this year, says much of that will come from regions such as Guangxi, Guizhou and Inner Mongolia.

Inner Mongolia is close to coal resources, so will enjoy favorable electricity costs, and is not far from key consumption markets in the east of the country, she said. Guangxi, meanwhile, has abundant alumina. All three regions were exempt from winter cuts.

The new smelters’ production costs “should be lower than the very old ones, especially for the SOEs,” which are trying to reduce costs and make profit, Wang said.

Reporting by Tom Daly in BEIJING and Melanie Burton in MELBOURNE; Editing by Josephine Mason and Philip McClellan

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