China’s aluminium output drops as Shanghai price sinks

The Shanghai aluminium price hit its lowest level since October 2016 yesterday. At a current 13,700 yuan per tonne the most active contract on the Shanghai Futures Exchange (ShFE) is down by 13% from the start of January.The London Metal Exchange aluminium price has also been under pressure from bearish funds but is down by a relatively mild 6% on the start of the year.Aluminium’s persistent price weakness is compressing producer margins everywhere but the pressure is greatest in China and there are signs that it is claiming ever more smelter victims.Chinese production dropped sharply last month, according to the International Aluminium Institute (IAI), and unless the Shanghai market can break out of its downtrend, more smelter casualties seem likely.The flip side is that the aluminium market probably doesn’t need to worry much about the impact of this year’s winter heating season restrictions in China since price has taken over from smog as the key driver of short-term output trends in the world’s largest producer.Hedge funds don’t much like aluminium’s short-term price prospects.All the LME base metals have found themselves the wrong side of the trade war trade, as short-sellers bet on economic slowdown, particularly in China, to dampen demand. Aluminium’s own dynamics are soggy with falling but still large off-market stocks, plentiful scrap supply and growing confidence that a US sanctions deal will be reached with Russian producer Rusal.Chinese speculators don’t like aluminium either and, in Chinese style, they’re expressing their view by moving to other markets.The most recent three-month slide in the Shanghai price has been accompanied by a noticeable drop in trading activity on the ShFE aluminium contract.Volumes in October slumped 37% from last year, while cumulative volumes in the first 10 months of this year were down by 25%. The looming seasonal slowdown in demand and expectations of a limited supply hit from this year’s winter heating season restrictions are unlikely to entice investors back any time soon.The Shanghai aluminium price is now at a level where significant numbers of smelters are suffering extreme margin compression. Some are closing.Two smelters in the province of Qinghai with combined capacity of 270,000 tonnes per year have gone off line in the last couple of weeks, according to BMO Capital Markets.BMO estimates total closures this year now amount to around 1.8mn tonnes of smelter capacity. The pace seems to be quickening as the price continues sinking. The latest IAI estimates of Chinese production suggest a sharp month-on-month drop in average daily output to 98,390 tonnes in October, the lowest national run-rate since March. Annualised production has fallen by almost 1.2mn tonnes since June with price pressures interacting with Beijing’s ongoing structural reform of its aluminium industry. The official production figures released by the National Bureau of Statistics are consistently lower than those of the IAI but they too indicate declining production over the last three months.Average smelter production costs in China are now 800-1,000 yuan-per-tonne above the current metal price, according to Paul Adkins of aluminium consultancy AZ China. Chinese smelters have been here before, most recently in 2015 when the Shanghai price slumped to 10,000 yuan.Back then the price was 2,000 yuan below average production costs, suggesting many producers will soldier on in the short term, according to Adkins.However, with prices still sliding and demand likely to slacken into the Chinese winter, “it’s only a question of when” more curtailments happen, he said.Price has overtaken pollution as the key determinant of Chinese production dynamics over the coming months.The impact of last year’s blanket curtailments on heavy industries, including aluminium, in the region around Beijing over the winter heating months underwhelmed the market.Several key producers persuaded the authorities that “illegal” capacity already closed could count towards their winter cutback targets.Andy Home is a columnist for Reuters. The views expressed are those of the author.