All eyes on China’s aluminium sector but little clarity

It’s all about China. This has been the mantra of the industrial metal markets for over a decade.The country’s industrialisation and urbanisation programmes have been the core driver of demand growth across the metallic spectrum.In the case of aluminium, however, China’s influence on the global supply chain is double-edged.As well as being the biggest user of aluminium, China is by some margin the largest producer, accounting for over 50% of global output.That dominant role is now in focus as Beijing launches what looks like a multi-pronged attack on its aluminium producers.Production cuts in regions around the capital have been mandated for the coming winter heating season, which starts in November. Separately, what Beijing terms “illegal” capacity is being closed right now.Analysts have tracked some two mn tonnes of “closures” with a broad consensus another four mn tonnes is at immediate risk.Throw in rolling environmental inspections and a requirement that all new capacity must be offset by the closure of older capacity and it does look as if Beijing is finally getting serious about reining in its aluminium sector.The rest of the world is watching closely. China’s exports of surplus aluminium in the form of semi-manufactured products have set it on a collision course with the Trump Administration.The market is also watching closely.This totally new threat to global supply is why the London price has been trading consistently above the $1,900-per tonne level for the first time in three years.But what is actually going on? If so much capacity is being closed, why is the country’s production rising? And even more critically, should be believe the official numbers?China’s production of primary aluminium hit a record high of 97,700 tonnes per day in June.That was equivalent to an annualised run rate of 35.7mn tonnes and represented 56.5% of global output, also a fresh high.These are the official figures from China’s Nonferrous Metals Industry Association (CNIA) published by the International Aluminium Institute.Counting aluminium production should be a straightforward statistical exercise.Aluminium smelters are big and in the case of the new generation of plants in China very big indeed.But the official numbers, which is all most of us get to see, raise more questions than they answer.It’s not just CNIA’s habit of occasionally throwing large historical revisions into the mix, it’s the monthly volatility that has become a running feature of the numbers.June’s annualised run rate, for example, was 2.4mn tonnes higher than that in May.The scale of that change, even allowing for the number of operating smelters in the country, stretches credulity.Moreover, industry specialists such as Paul Adkins of the AZ China consultancy now believe the official figures are diverging from reality in a different way.AZ China does its own production count and estimates actual daily production was 104,000 tonnes in June.It also thinks there was a similar-sized undercount in both April and May.The cumulative annual discrepancy based on the last three months would be around three mn tonnes. The official figures, according to Adkins, speaking in the Reuters Global Base Metals Forum on Thursday, are “misleading to say the least”. The disappearing tonnage in the official figures coincides with Beijing’s edict on closing “illegal” capacity, raising the intriguing possibility that whoever counts China’s production has simply eliminated “illegal” smelters, irrespective of whether they have been closed or not.If so, one of the first casualties of the drive to clean up the country’s aluminium smelter sector might turn out to be statistical transparency.This is a potential nightmare for a market which has pinned so much bullish expectation on Chinese capacity closures.If we can’t trust the official production figures, how will we know how much capacity is being taken off-line?And even if capacity is being taken off-line, will it stay that way?