China's net demand for aluminium to support world prices: Fortis

London (Platts)--12 Jun 2008 Despite growing London Metal Exchange inventories and a suggested surplus, growing Chinese net demand for aluminium is expected to support world prices, Fortis said in its June metals monthly research note, pegging its short-term LME three-months price forecast at $2,800-3,100/mt.

The bank noted that energy shortages in China continued to affect the outlook for the country's aluminium production, "and this will play into the hands of the desire of the central planning authorities to stem exports of aluminium and aluminium products in order to conserve energy."

Fortis said this was changing the underlying position of China as a supplier of aluminium to the rest of the world. "In the first four months of 2008 China was a net importer of primary aluminium, but continued to export a lot of aluminium products, which benefit from avoiding the 15% export tax put on primary aluminium to curb exports," Fortis said, adding that cutting exports of aluminium products could be achieved by export duties, but high energy costs might do the government's work for it.

"China has kept the price of power to its aluminium smelters below the cost of supplying power, but in February the National Development and Reform Commission announced that such preferential tariffs were to be scrapped, and given the soaring cost of coal (80% of China's electricity comes via coal burning) large electricity price hikes are likely," said Fortis.

It said this should should lead to the closure of many smelters that lack alternative sources of cheap power. "While the outlook for China's aluminium demand is so positive, to bring exports and imports into balance really only requires a pause in the growth in China's aluminium production capacity," said Fortis.

The bank noted that the country produced about 12.6 million mt of aluminium last year, of which 1.2 million mt was exported in some form, meaning domestic consumption was 11.4 million mt. "If consumption grows by 10% this year to 12.5 million mt, and if production remains unchanged, the country's trade would be almost in balance," Fortis said, adding that the adjustment was unlikely to be this quick but it believed that China would be a net importer of all aluminium by 2009.

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