Aluminium enters 2017 on the back foot. Its advance in price last year lagged the other main industrial metals and the promise of more supply from China suggests even those modest gains may be vulnerable.
The world’s biggest producer is firing up new plants and restarting idled capacity to take advantage of an 18% increase through November that lifted prices of the lightweight metal from near six-year lows. That gain has been chipped away over the last month as the market digests the prospect of a wall of supply that could see production growth more than double, even as China’s economic growth flattens.
Aluminium on the London Metal Exchange (LME) ended 2016 with a 12% gain, while top performer zinc rose 60%. On the Shanghai Futures Exchange, aluminium was 18% higher, about half the increase through November. The metal in London was unchanged in Asian trade on Tuesday, while falling 1.1% in Shanghai.
China’s capacity increases will come from both big and small players, including the two largest producers, China Hongqiao Group and Aluminium Corp of China, or Chalco, according to SMM’s Liu. China Hongqiao declined to comment and Chalco didn’t immediately respond to a request for comment. 
Unlike metals such as zinc and nickel, which have been energised by shortages and the prospect of mine shutdowns, aluminium supply is facing no such headwinds. The risk is that China’s smelters, which account for more than half the world’s output, will repeat the experience of its steel industry: saddled by overcapacity, mills exported their surplus onto world markets, spurring trade tensions that forced the issue onto the Group of 20’s agenda last year.
“There’s huge pressure from the supply side,” according to Liu Xiaolei, an analyst with researcher SMM Information & Technology Co, in Shanghai. Liu forecasts that the Chinese market will swing to a surplus this year. 
Liu expects a surplus of 1mn metric tonnes in 2017, from a deficit last year of 650,000 tonnes. China boosted production to a record high in November, and in December the nation’s top metals industry group warned that prices could slump as domestic supply rises.
China’s output may rise 8.8% to 34.7mn tonnes in 2017 after an estimated 3.6% gain last year, according to Wan Ling, a chief analyst at consultant CRU Group in Beijing. That kind of increase would account for about 70% of global growth and will spur exports, creating a “slight surplus” on the world market after a deficit in 2016, she said. Wan forecast prices in London will average $1,560 in 2017, from $1,693 at the end of last year.
SMM’s Liu expects even more aggressive growth, with Chinese output surging 13% to 36mn tonnes after new capacity additions of 4mn tonnes, versus 3mn tonnes in 2016.
Liu sees aluminium product exports rising to a record 4.3mn tonnes from about 4mn tonnes in 2016. Aluminium in Shanghai fell to its cheapest in over a year relative to London in December as the yuan sank to an eight-year low. While agreeing that Chinese production will exacerbate oversupply, Helen Lau, an analyst at Argonaut Securities in Hong Kong, said outbound shipments could actually fall in 2017 as Donald Trump’s election in the US cements the kind of protectionist policies that have been applied to steel.
“Global protectionism still exists as does anti-globalisation,” said Lau. “That’s also clear from Donald Trump’s rhetoric, though he is yet to start making policies.” A US trade body has already sent a memo to the president-elect’s transition team asking that it make “unfair trade practices” by Chinese aluminium producers a top priority.


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