Analysis of The Domestic Aluminum Industry in 2017



Analysis of The Domestic Aluminum Industry in 2017

2016, the starting year of the 13th Five-Year period, was a satisfactory year for aluminum enterprises. With the government's intensified efforts in supply-side reform, economic restructuring achieved initial results, market demand improved and the aluminum price increased on a monthly basis. Meanwhile, industry self-regulation played a positive role in promoting the development of the enterprise. Aluminum plants generally achieved a profit and some enterprises reversed the losses seen in previous years. The situation was very gratifying especially before October. But since October, the situation has changed gradually. In 2017, the situation will not be optimistic; aluminum enterprises need be fully prepared to meet the challenge.

1. A review of the aluminum industry in 2016

(1) Steady growth in production capacity and output

According to Antaike's estimates, until the end of 2016, China's alumina production capacity reached 74.45 million tons / year, up by 7.2% year-on-year and aluminum production capacity reached 42 million tons / year, up by 8.0% year-on-year. It's estimated that the annual alumina output reached 60.16 million tons, up by 2.6% year-on-year and the annual aluminum output reached 32.50 million tons, up by 5.5% year-on-year.

(2) Energy consumption of aluminum

During January and November, DC power consumption per ton of aluminum was 12,905 kWh, AC power consumption per ton of raw aluminum was 13,260 kWh and integrated AC power consumption per ton of aluminum ingot was 13,591 kWh.

(3) Economic benefits

During January and November, aluminum smelting generated a profit of RMB 18.48 billion, up by 145 times, or RMB 18.35 billion from RMB 130 million over the same period last year. During January and November, aluminum smelting costs or fixed assets investment was RMB 56.19 billion, up by 9.29% over the same period last year.

(4) Import and export

During January and November, bauxite imports were 47.394 million tons, down by 1.604 million tons from 48.998 million tons over the same period last year; alumina imports were 2.66 million tons, down by 1.45 million tons from 4.11 million tons over the same period last year; net imports of raw aluminum were 113,000 tons, down by 11,000 tons over the same period last year; net imports of aluminum products were 3.36 million tons, down by 15,000 tons over the same period last year.

2. Analysis of the aluminum industry

(1) Deepened reform and improved market situation

In 2016, as China deepened economic reform and achieved remarkable results in economic transformation and structural adjustment, especially in supply-side structural reform, economic development stabilized, market demand improved and aluminum demand increased. In 2016, the domestic consumption of raw aluminum was expected to be 32.70 million tons, up by 2.39 million tons year-on-year. The growing demand promoted an increase in aluminum prices.

The improved supply and demand relationship significantly improved aluminum prices, although the cost of aluminum production slightly declined before October. In addition, the national steam coal prices rose a little, but not much. In March, the steam coal prices in the Bohai Gulf were between RMB 350-370/ton. The average cost per kWh of each plant of enterprises in Middle Eastern China was roughly RMB 0.20, the cost in Western China was below RMB 0.18, and the figure was even lower in Xinjiang and Tongliao in Eastern Inner Mongolia. Some enterprises obtained a low electricity price through direct purchase. In addition, alumina prices were still low before October. Meanwhile, anode carbon block and fluoride prices were also at a low level and the national average pre-tax cost of aluminum was less than RMB12, 000/ton. So, although the situation has changed since October, aluminum plants had a satisfying year in 2016.

(2) Industry self-regulation ensured smooth operation of enterprises

Enterprises have gradually realized that the role of self-regulation in the healthy and sustainable development of the industry cannot be ignored. For years, the China Nonferrous Metals Industry Association has attached equal importance to competition and self-regulation and encouraged enterprises to establish partnerships and carry out flexible production by taking measures such as advance overhaul and postponed operation of electrolytic tanks during the overhaul period, suspended production, transformation and technical upgrading of production series with poor technical and economic indicators, and the increase of capacity, which can delay the starting date for production. The output growth rate has been effectively controlled through flexible production. Aluminum enterprises in the industry firmly believe in unity and cooperation, and have effectively regulated market order and ensured the room for profitability.

(3) Enterprises strengthened management and achieved significant results in potential control and efficiency improvement

Attention to detail and strengthened management has been a permanent theme of enterprises. The affiliated enterprises of Aluminum Corporation of China contributed to profitability through measures such as target decomposition and cost management. Aluminum Corporation of China integrated poor assets and initiated a series of measures such as opening up new growth points, which enabled the company to achieve profitability in 2016.

3. Thinking about the aluminum industry in 2017

(1) A long way to go to solve overcapacity

In 2016, aluminum production capacity was increased by 3.10 million tons / year, and there are still some of the new or expansion projects under construction. In 2015, the National Development and Reform Commission and the Ministry of Industry and Information Technology cleaned up the illegal-built, under-construction and proposed aluminum projects and required that some of the under-construction and proposed projects might proceed after obtaining equivalent replacement targets. It's learned that currently, target replacement is very hard for various reasons. According to some 13th Five-Year development plans of local governments available to the author, energy- or bauxite-rich regions plan to establish a complete aluminum-electric power and deep processing industry chain in the form of an industrial park. If all the planned goals are met, the aluminum production capacity will undoubtedly exceed 45 million tons/year by the end of 2020.

In 2016, some enterprises suspended the production of aluminum with a total scale of more than 2.4 million tons and became "zombie" enterprises, but the production capacity could be used for replacement. In addition, some enterprises with idle capacity silently waited for market changes and the proper moment for action.

(2) Rising energy and raw material prices, and increasing production costs

In the fourth quarter of 2016, the steam coal prices rose significantly. The rising coal prices across the country led to an increase of RMB 0.04-0.10 per kWh in the power generation cost of power plants. The electricity price of an enterprise in Shandong exceeded RMB 0.35 per kWh and despite a slight increase in coal prices in Shaanxi and Gansu, the electricity price in the two provinces was increased by about RMB 0.04 per kWh. The national policy indicates the government's determination to reduce coal capacity, so the trend of rising electricity prices is shown.

Alumina prices were increased by RMB 600-800 / ton in in November from September, and even exceeded RMB 3,000 / ton for a short time in December. Although alumina enterprises stopped suffering losses, they were still under heavy pressure of increasing costs as a result of rising coal, alkali and bauxite prices.

As aluminum carbon and fluoride salt prices are rising, aluminum costs continue to rise. It is estimated that the pre-tax costs of aluminum per ton is RMB 12,500-13,500 in the first quarter of 2017. If the aluminum prices fall below RMB 12,000 / ton, the profitability of enterprises will be substantially reduced. Due to rising steam coal prices, coal-fired power generation companies around the country have eagerly called for an increase in electricity prices. Even some hydropower enterprises claim they've suffered losses from the power generation business. Therefore, on the whole, some aluminum enterprises may experience difficulty and it would be good for them to maintain cash flow and production. Only a minority of enterprises can make a profit.

(3) Increasing environmental pressure

China would have the carbon dioxide emissions peak at around 2030 or earlier and reduce carbon dioxide emissions per unit of GDP by 60%-65% than in 2005. The Paris agreement entered into force on November 4, 2016. China's "carbon trading" has already begun. At the end of 2016, the government completed the allocation of a greenhouse gas emissions quota to all provinces, autonomous regions and Xinjiang Construction Corps and proposed a short-term goal of reducing carbon dioxide emissions by 15% in 2020 than in 2005. Although greenhouse gas emissions such as carbon dioxide won't increase their cost in the short term, the enterprises have been under increasing environmental pressure. It's learned that the government departments in Huolinhe Region have required zero emissions of enterprises. Recently, the State Council issued the 13th Five-Year Plan for Ecological and Environmental Protection, which put forward specific requirements for the control of SO2, N0x and solid waste. Environmental improvement requires money and will affect the profitability of enterprises, but we must face this challenge. Enterprises must ensure production while creating a good environment for future generations.