Does the aluminium market need more Chinese metal?

With LME stocks of aluminium surging by a net 81,975 tonnes to above 1.7 million tonnes on Tuesday and the three-month metal price nudging 3-year lows of $1,870 per tonne, the answer to the question of whether the aluminium market needs more Chinese metal would appear to be a resounding "no".

Yet an already glutted market may have to face up to greater exports from China as the authorities start reversing their trade policy on the light metal.

CLOSING THE DOOR...

Beijing has waged a long war of attrition against its chaotic, fragmented aluminium smelter sector.

China's aluminium production capacity growth has outpaced even the country's stellar demand growth in recent years. The result has been a consistently high level of aluminium exports.

Given the significant amount of energy needed to produce aluminium, high exports of metal are de facto exports of power, which China can ill afford given its regular electricity shortfalls during periods of peak usage.

However, the aluminium-smelter sector has proved remarkably resistant to central government efforts to restrain it. A couple of years ago, the main weapon used by the authorities came in the form of multiple directives stipulating minimum production capacity, energy usage and technology parameters for individual smelters.

The aim was to force older, less-efficient plants to close. They did, only to be replaced by a host of new, larger plants using more modern technology.

More recently, Beijing has used its export tariff regime to penalise exports. A punitive 15 percent export tax was slapped on primary aluminium in November 2006. Exports duly fell but those of other forms of aluminium rose.

Each time the authorities brought other export tax codes into line with the 15 percent applicable to primary metal, the flow of export metal miraculously changed form, often literally, to qualify for lower taxes, or in the case of some products, export tax rebates.

The most recent loophole to be closed was one covering the aluminium alloy category. It turned out, too many smelters were making cosmetic changes to their primary metal so they could pass through customs as alloy, when it was no such thing by the standard industry definition of alloy.

The tactic was largely successful. Net exports of aluminium and "alloy" -- as some exporters listed it -- peaked at 111,000 tonnes in June, since when they have trended steadily lower. The preliminary figures for October showed net exports of both categories falling to 27,000 tonnes.

...REOPENING THE DOOR

However, while primary and alloy exports have been falling, those of aluminium product have remained high.

Various forms of product have also been a battleground between the authorities and wily exporters. There were net export surges in Q2/Q3 2007 and again in Q4 2007/Q1 2008 before more export tax loopholes were slammed shut by the authorities.

Since then net products have been more stable but they have levelled off at a historically high level, averaging around 125,000 tonnes per month over the last six-month period through October.

It appears the aluminium smelter sector is aggressively developing downstream into products manufacture. It is a victory for Beijing, which has encouraged just such an industry move, but it is only a partial one since high product exports suggest continued oversupply of aluminium in the domestic market. More of that oversupply is in the form of product rather than primary metal but it is still metal that is surplus to domestic requirements.

This is the background against which Beijing has started reversing its policy on aluminium exports.

The entire global smelter sector is suffering from current depressed prices but there is little doubt that Chinese smelters are suffering the most.

National favourite Chalco has already announced swinging production cuts, taking 720,000 tonnes of annualised capacity offline. Many others have also idled older production lines, although, as ever with China, the impact may be mitigated in part by the fact that new capacity is still being brought onstream.

Meanwhile, the authorities have just announced they are increasing the tax rebate on exports of aluminium sheet, plate and strip from 11 percent to 13 percent to provide a lifeline to struggling smelters.

These are relatively high valued-added products, categories which still accord with Beijing's policy of encouraging such production over "commodity" aluminium.

But locals seem to be expecting more tariff changes, covering greater amounts of product. Beijing, for example, is expected to reinstate up to 8-percent rebates on extruded aluminium profiles.

This amounts to only a partial re-opening of the export door, but the recent history of China's aluminium trade has shown that struggling smelters need to see only a tiny gap in the tariff regime before rushing en masse through it.

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