Aluminum Expansion Approaches The Inflection Point, With The Core Of A New Round Of Overcapacity Cutting As Self-Built Power Plants



Aluminum Expansion Approaches The Inflection Point, With The Core Of A New Round Of Overcapacity Cutting As Self-Built Power Plants

Shandong Development and Reform Commission recently announced in a document that based on the enterprise self-inspection and provincial inspection results, it had ordered Shandong Weiqiao Pioneering Group and Xinfa Group to close 3.21 million tons of illegal aluminum production capacity by the end of July. Besides Shandong, other provinces and regions with high aluminum production capacity such as Xinjiang, Inner Mongolia and Fujian also took such actions before. As of July 2017, China’s aluminum operating capacity was 38.36 million tons, with Shandong as the largest aluminum production province. The closed illegal production capacity this time was nearly 1/10 of the country’s total.

Aluminum overcapacity cutting has been gradually accelerated since April when National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Land and Resources and Ministry of Environmental Protection jointly issued Notice on the Special Action Work Program for Cleaning Up and Rectifying Illegal Projects in the Aluminum Industry (hereinafter referred to as the Notice), deciding to complete the clean-up and rectification of illegal aluminum projects in six months through enterprise self-inspection, local inspection, special spot check and rectification under supervision.

In other words, this round of aluminum industry clean-up and rectification is expected to be completed in October. “It is expected that as aluminum overcapacity cutting is implemented step by step in August, the reduced output will gradually affect the supply of aluminum,” said an insider to CBN reporter.On the other hand, the “pursue for government funds owed by aluminum enterprises with self-built power plants” put forward by National Development and Reform Commission and National Energy Administration in early August will increase the production costs of relevant aluminum enterprises, and stimulate production capacity reduction from another aspect.

Aluminum has become a new overcapacity cutting object attracting most market attention in 2017.

Data show that China is currently the world’s No.1 producer of aluminum, and has maintained rapid growth in recent years. Its average annual output compound growth rate was 14.45% in 2010~2015, while the figure for the rest of the world in the same period was -0.31%. According to the statistics of World Aluminum Association, in 2016, the global aluminum output was 58.89 million tons, and China’s aluminum output topped 31.64 million tons, accounting for 53.7% of the world’s total.According to the data provided by Zhongyu Information, it is expected that in 2017, China’s aluminum production capacity and output will be 46 million tons and 36.5 million tons respectively, but the demand will only be 35.07 million tons, with a surplus of 1.43 million tons.

Considering the achievements made in steel and coal overcapacity cutting, the fight against aluminum will be a main event this year.

Just two days after the issuance of the above-mentioned notice, Changji Government in Xinjiang also issued an announcement of stopping three 2,000,000t aluminum projects under illegal construction. Prior to this, Xinjiang Uygur Autonomous Region Party Committee and Government had made five handling decisions on illegal production capacity, including investigating and affixing the responsibility for persons in charge of illegal enterprises, ordering relevant enterprises to fulfill the promise of production capacity equivalent replacement within a time limit, and imposing government funds and surcharges on the self-built power plants of illegal enterprises according to law.

On May 10, Inner Mongolia Autonomous Region Government organized a special action work conference for cleaning up and rectifying illegal projects of steel and aluminum, requiring to inspect aluminum enterprises within the scope of clean-up and rectification, and put forward handling opinions and formulate inspection reports on problematic enterprises according to national requirements.

On May 15, Fujian Province issued Special Action Work Program for Cleaning Up and Rectifying Illegal Projects in the Aluminum Industry, clearly indicating that it would complete enterprise self-inspection, local inspection, special spot check and rectification under supervision within five months.

At present, market attention is mainly concentrated in the efforts made in promoting the overcapacity cutting policy. Sinolink Securities nonferrous analyst Li Shuaihua told the reporter that the aluminum overcapacity cutting policy would tend to be rigid for some time in the future.

“The overcapacity of the aluminum industry is structural and low-end, while the high-end capacity is insufficient. The global demand for high-end aluminum products is not small, especially in electronics, aviation, transportation and other high-tech industries,” said Hu Chi, a researcher of State Council SASAC Research Center to CBN reporter.

A director of a group in south China engaged in energy investment told CBN reporter that the impact of carbon emission reduction and other factors had made it difficult to get approval of self-built power plant projects from National Development and Reform Commission.

The aluminum products of both Weiqiao and Xinfa have large cost advantage due to their self-built power plants. “This is also the main reason why aluminum enterprises with self-built power plants are willing to expand production,” said Wu Qi, director of the commercial bank research center at the research institute of Hengfeng Bank who had worked in Datang Power, to CBN reporter. “Electricity price difference has directly led to problems such as cost inequality in the aluminum industry, which is obviously not conducive to the standardized development of the industry and the promotion of the overcapacity cutting work.”

According to the calculation of China Credit Rating Co., Ltd., the power consumption for the production of aluminum is 13,200~13,500 kwh/t. Therefore, the reduction of electricity cost by 0.1 yuan/kWh will contribute to a gross profit of at least 1,320 yuan/t, equal to the total freight of transporting one ton of aluminium oxide to Xinjiang and transporting corresponding aluminum products out of Xinjiang.

In view of this, National Development and Reform Commission and National Energy Administration put forward the “pursue for government funds owed by aluminum enterprises with self-built power plants” at the electricity reform briefing on August 3. China Credit Rating Co., Ltd. predicts that if the government funds and surcharges imposed are 0.05 yuan/kWh, a total of 650 million yuan will be paid for every 1 million tons of aluminum. This will bring about great cost pressure to aluminum enterprises, and ultimately stimulate capacity reduction.

Like the situation of steel overcapacity cutting, the price of aluminum will rise after supply-demand reconstruction. Prospective Industry Research Institute believes that once the illegal overcapacity is cleaned up by force, coupled with protection stopping for environmental protection in the heating season during winter, about 1 million tons of aluminum production capacity in China will be affected. Aluminum shortage may be highlighted in the fourth quarter of 2017, and the supply-demand inflection point is approaching.

It is predicted in the Analysis Report on the Production and Marketing Demand and Prospect Forecast of the Aluminum Industry of China issued by Prospective Industry Research Institute that, by 2018, China’s primary aluminum consumption compound annual growth rate will be about 5.5%, and the costs of aluminum raw materials will rise to some extent. In the context of supply-demand balance, the price of aluminum will keep increasing in the future, expected to be about 12,500 yuan/t.

In fact, the concentration of the aluminum industry has been high, which is in stark contrast with the steel industry featuring low industry concentration. CBN reporter has found through statistics that, there are 11 aluminum enterprises with a production capacity of over 1 million tons in China, including CHALCO, China Hongqiao, Xinfa Group, SPIC, East Hope, Jiugang Group, Shenhuo Group, Yunnan Aluminium, Qiya Group, Zengshi Group and Jinjiang Group. By the end of 2016, their total production capacity and output accounted for about 70% and 74% of China’s total respectively.