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COLUMN-Global aluminium production is falling, but for how long? Andy Home
(Repeats with no change to text. The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, Aug 24 (Reuters) - Global aluminium production fell by 1.2 percent to 33.12 million tonnes in the first seven months of this year, according to the International Aluminium Institute (IAI).
It doesn't sound like much and in volume terms the decline amounts to just 390,000 tonnes, no more than a drop in the global aluminium ocean.
But this is the first year that output has consistently fallen since 2009, a year when financial crisis was rapidly morphing into manufacturing crisis with devastating consequences for aluminium producers.
Equally noteworthy are the divergent trends between dominant producer China and the rest of the world.
Production in the latter contracted over the 2012-2014 period on a combination of closures and curtailments but it has been creeping higher since the start of last year and is up another 1.3 percent over the year to date.
China, meanwhile, has long been the driver of production growth to the point that it has lifted its share of global output from under 30 percent at the start of 2009 to around 54 percent.
But not this year. Output has declined year-on-year in six of the first seven months with cumulative production of 17.76 million tonnes down by 3.1 percent.
It's an unexpected outcome but goes some way to explaining aluminium's equally unexpected price strength so far in 2016.
In the London market benchmark three-month metal last week poked its head above the $1,700-per tonne level for the first time in a year and is currently trading just below there at $1,680.
The Shanghai price has performed equally well, indeed better at times thanks to some extra bullish spice provided by a lack of metal in deliverable form and resulting low stocks.
All of which is a far cry from the doom and gloom pervading this market at the start of 2016.
But is it a sustainable turnaround or merely another false dawn?
Everything comes down to what happens next in China's leviathan smelter sector.
REST OF THE WORLD - MORE OF THE SAME
Production in the rest of the world can be expected to continue trending gently upwards.
The last round of curtailments, largely of U.S (Other OTC: UBGXF - news) . capacity and largely from Alcoa (NYSE: AA - news) , has now played itself out.
North American production troughed at 3.87 million tonnes annualised in March and has since stabilised around the 3.95 million level.
Offsetting the cuts has been the ramp-up of the new expanded Kitimat smelter in Canada, which hit nameplate capacity of 420,000 tonnes in the second quarter of this year.
Also rising again is Russian output, where the new 600,000-tonne per year Boguchansk smelter is currently operating in what owner Rusal (HKSE: 0486-OL.HK - news) calls "test mode". Second-quarter output of 38,000 tonnes implies it is operating at around 150,000 tonnes per year with plenty of potential upside.
However, the real driver of rising non-Chinese production is Asia, where production boomed by almost 15 percent in the first seven months of 2016.
Four new smelters have started up over the last year in India. Hindalco's 360,000-tonne per year Mahan smelter hit capacity at the end of 2016 and its similar-sized Aditya plant did so in the second quarter of this year.
Both of Vedanta Resources (Other OTC: VDNRF - news) ' new smelters are still in ramp-up mode. The first line of Jharsuguda is now fully operational and the second line began commissioning last month, while the Korba II plant has been commissioning pots since April of this year.
While such new capacity comes on-line, higher prices have removed any requirement for more cuts at older, higher-cost plants.
The short-term prognosis is for the current mild uptrend in production to continue running through the end of this year.
Graphic on Chinese production and price:
Graphic on China's exports of semi-manufactured products:
CHINESE SURPRISE
Which leaves China as the key determinant of the short-term global production trend.
The year-to-date decline in production has delivered something of a welcome surprise to a market that has long bemoaned Chinese authorities' frustrating habit of subsidising loss-making aluminium smelters while incentivising a flow of excess metal out of the country in the form of semi-manufactured products.
But with hindsight it's clear that the November slump in the Shanghai cash price to below 10,000 yuan per tonne generated a significant supply reaction.
Chinese production fell sharply over the course of December, January and February before partly recovering over the March-June period.
It slumped again in July by an annualised 1.37 million tonnes, although the production figures supplied to the IAI by the China Nonferrous Metals Industry Association are prone to a degree of monthly volatility that can only derive from the statistics, not the reality of smelting aluminium.
Still, the broad picture of slower output this year is matched by a mild contraction of the country's aluminium escape valve.
Exports of semi-manufactured products were down by almost seven percent to 2.37 million tonnes in the January-July period.
China is still exporting its surplus but that surplus appears to be smaller to the extent that talk of a global supply deficit no longer appears fanciful.
BUT FOR HOW LONG?
How long can these bullish production trends last?
Unfortunately, not for long, seems to be the general consensus.
Chinese smelters have historically proven themselves very sensitive to price and after falling below production costs late last year, the concern is that the current Shanghai price above 12,500 yuan will simply encourage restarts or the implementation of expansions that had been deferred.
Consultancy AZ China, for example, is forecasting around three million tonnes of capacity to be added this year in a combination of greenfield plant and restarts.
However, it assesses that only a third of this actually happened in the first half of the year, meaning a lot more in the second half with yet more start-ups seen in early 2017.
This is one clear and present danger to this year's mini-rally and a reminder that China is not just the world's largest producer but also the location of significant excess smelter capacity.
The second may be a build-up of stocks of semis in the country, partly because of heightened political sensitivity about aluminium exports and partly because of a largely negative arbitrage.
Evidently, were production to start re-accelerating over the coming months, there might be a significant knock-on-effect on semis exports.
The message to the rest of the world's producers should be to enjoy the price rally while it lasts. It would only take a couple of deferred expansions in China to start ramping up to shift both its and global production back onto an upward path.
(Editing by Adrian Croft)
