China supply could limit aluminium gains

The aluminium market faces the prospect of a growing surge of supply from China this year that could disrupt expectations of a global deficit.

A divergence in prices between China and the rest of the world could spur exports and limit aluminium’s price gains this year, analysts say. A falling rouble that has improved the competitiveness of Russian smelters could also prompt more supply.

At $1,765 a tonne, the London Metal Exchange price for three-month delivery of aluminium has risen 1.4 per cent this year, the best performing base metal on the exchange.

Consultancy CRU forecasts a global deficit of 600,000 tonnes this year but a 1m tonne surplus for China. The difference in prices has driven exports of fabricated forms of the metal, as companies lobby the government for a lifting of taxes that limit exports of the primary product.

China will carefully research an industry recommendation to reduce or abolish a tax on primary aluminium exports, the ministry of commerce said last week, according to Reuters.

The country’s largest companies are already suffering from a weak domestic market with Chalco, China’s largest aluminium company, warning of a Rmb16.3bn loss for 2014 in a statement to the Shanghai stock exchange this week, at least double the loss expected by analysts.

While China is unlikely to get rid of the tax on primary exports, due to the government’s reluctance to export raw metal, some of the semi-fabricated exports coming out of China are not too dissimilar, analysts say.

Chinese companies can earn $300 a tonne by exporting semi-fabricated product due to the price differentials, according to Gayle Berry, an analyst at Jefferies.

“This perceived tightness in the aluminium market is at risk from Chinese exports,” she said. “You can make a huge amount of money by exporting right now, with two markets that have such wide discrepancy it’s normal economics that material will find its way. Where people can make money they will find a way of doing it.”

It is estimated that 68 per cent of the industry in China was making a loss in the fourth quarter last year. While there have been some small cuts to Chinese aluminium production, new lower-cost capacity has come online in western provinces, Ms Berry said.

“Many Chinese aluminium smelters enjoy access to interest-free loans so providing they have access to this credit they can continue running at a loss,” she said.

Overcapacity in China is in contrast to capacity cuts elsewhere in the world, where Rusal, the world’s largest aluminium producer, has idled smelters.

Yet weaker Russian economic growth could lead to more metal being exported from the country, according to one trader.

In addition to any exports, lots of aluminium remains locked up in warehouses around the world, a legacy of deals to obtain financing from banks. This could be released on to the market, further damping the price.

“Aluminium is still in intensive care, it just hasn’t died,” one trader said.

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