COLUMN-Aluminium-China versus the rest of the world: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, Dec 20 (Reuters) - The global aluminium production sector is becoming ever more polarised.

China's national output of the light metal has risen by 3.36 million tonnes annualised since the first quarter of this year.

That in the rest of the world has contracted by 1.06 million tonnes over the same period.

China is now within a whisker of producing half of the world's aluminium output. Average daily production in November was 65,130 tonnes, according to the China Nonferrous Metals Industry Association. That everywhere else was 65,630 tonnes, according to the International Aluminium Institute (IAI).

It may, indeed, have already got there. Both agencies include an estimate for unreported production. That for China currently stands at 200,000 tonnes per month. That for the rest of the world at 65,000 tonnes.

If it hasn't, it's probably only a matter of time since the increasingly divergent production trends show no signs of stopping.

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Graphic on global production trends:

http://link.reuters.com/mac65v *******************************************************

RAMP DOWN

Outside of China the world of aluminium smelting is characterised by high stocks, low prices and producer pain.

Producers have announced cutbacks of around 1.2 million tonnes this year. November production fell to an annualised 23.94 million tonnes, the lowest run-rate since February 2010, when output was still recovering from the Great Financial Crisis.

However, not all of those cutbacks have yet shown up in the IAI figures through November.

Included in the net 1.06-million tonne decline since March is one non-price related outage, namely that of a 370,000-tonne per year potline at the new Ma'aden smelter in Saudi Arabia.

Alcoa (NYSE: AA - news) , which operates the plant in a joint venture with Saudi Arabian Mining Co, said in October it had halted the line after "a period of pot instability" during the commissioning process.

It said it would accelerate the commissioning of the second potline but the overall impact on the plant's output and time-line to full operation is unclear.

However, it's noticeable that annualised production in the IAI's Gulf category has dropped sharply by just over 200,000 tonnes annualised over the course of October and November.

The implication is that production elsewhere has a bit further to fall as targeted high-cost smelters continue to ramp down, particularly in North America and Russia, where the curtailments are concentrated.

RAMP UP

China is not immune from the same price and margin pressures affecting producers everywhere else.

Older capacity has been closed. Probably not as much as should have been, given local governments' habit of subsidising loss-making plants.

The real game-changer this year, however, has been the ramp-up of greenfield capacity in the country's northwestern provinces, particularly Xinjiang, where a new generation of smelters using trapped coal reserves as a cheap power source is pushing national production ever higher.

Along with steel, aluminium is a regular on Beijing's list of bloated industries, blighted by overcapacity and in need of restructuring.

The latest salvo in the long-running battle between central and regional governments was fired in October, when China's State Council issued a new plan, promising to focus on "establishing and perfecting" market mechanisms to rein in recalcitrant sectors.

There are already reports of tougher environmental constraints on the steel sector, particularly on mills located near to smog-plagued Beijing.

Any impact on the country's aluminium sector, though, seems so far negligible, given the strength of the upwards trend in production over the last few months.

The real Achilles heel of the smelter sector is its reliance on imports of bauxite, particularly Indonesian bauxite.

That country's pending ban on exports of unprocessed minerals might pose some risk of disruption to affected Chinese smelters, but probably not any time soon.

The current consensus is that Chinese buyers have built up stocks ahead of the January 15 deadline and have also started looking elsewhere, particularly Australia, India and Guinea, for alternative supplies.

THREATS AND TENSIONS

Well, at least China is also the fastest-growing user of aluminium and so far at least any over-production is largely staying in China.

At least in terms of primary metal.

The country is still a marginal net importer, largely thanks to a prohibitive 15-percent export tax and to preferential tax treatment for operators tolling imported metal into products.

Which is why Klaus Kleinfeld, head of Alcoa, famously described it as existing in a parallel universe, cut off from the rest of the world.

It's a view that conveniently ignores the steady flow of semi-fabricated aluminium products out of the country.

Net (Frankfurt: NETK.F - news) exports were a not inconsiderable 2.16 million tonnes in the first 10 months of this year.

The best that can be said is that there has been no marked acceleration in this overflow from the Chinese market. The figure is up 14 percent on last year but broadly equivalent to 2011 levels.

The danger, though, is that this outflow will start accelerating as the domestic market struggles to cope with the scale of new production currently ramping up in the northwest.

The threat is compounded by the fact that the rest of the world just might shift into supply-demand deficit next year as the cutbacks in production start to bite.

Not sufficiently large a deficit to erode high legacy stocks but enough to incentivise Chinese exporters to lift sales.

There is certainly a tension between the twin trends of fast-increasing Chinese aluminium production and steadily declining output everywhere else.

Product flows will be the best gauge to measure how that tension is resolved in the coming year.

(Editing by William Hardy)