Column: Global aluminium output grinds higher in Q1: Andy Home
22/04/2013 14:55
(Andy Home is a Reuters columnist. The opinions expressed are his own) By Andy Home LONDON, April 22 (Reuters) - Aluminium prices are on the floor again. On the London Metal Exchange (LME) three-month metal CMAL3 recorded a low print of $1,818 per tonne last week, a level last seen in the dark days of 2009. Chinese prices for the light metal are faring no better. The most active contract SAFcv1 on the Shanghai Futures Exchange closed today at 14,565 yuan per tonne, also echoing the Great Global Contraction of late 2008-early 2009. These are distress prices for producers. Yet once again a collective response is conspicuous by its absence. Today's figures from the International Aluminium Institute (IAI) showed global output rising 4.5 percent over the first quarter of 2013. STATISTICAL NOISE Now, it is in the very nature of statistics that, as with beauty, truth is in the eye of the beholder. So be prepared for some very different interpretations of these latest global aluminium figures. Looking at March alone, for example, might generate a much more positive take on what is really going on in the global aluminium smelter sector. Annualised global production appears to have dropped by a massive 2.1 million tonnes last month, mirroring a similar-sized slump in Chinese run-rates. The only problem is that this apparent slump comes hot on the heels of an apparent 1.9-million tonne jump in Chinese output in February. The dynamics of the Chinese aluminium smelter sector are complex, older capacity in the south and east of the country closing and newer capacity in the northwest opening. Yet the scale of the month-on-month swings in the figures provided to the IAI by the China Nonferrous Metals Industry Association appears extreme even against such a backdrop. Indeed, seasoned observers of the Chinese aluminium industry point to similar statistical noise at the start of previous years. Last year, for example, Chinese output apparently also boomed in February, by 1.6 million tonnes, before slumping by 1.1 million tonnes in March. Coincidence or annual quirk of the Chinese aluminium data series? Time will tell. But in the interim it seems sensible to focus on the trend over the first quarter as a way of smoothing out this remarkable degree of monthly volatility. REGIONAL DIVERGENCE And on that basis, Chinese production was still up by 12.8 percent year-on-year over the first three months of 2013. That was the fastest rate of growth in any of the major geographic regions covered by the IAI's statistical net. *********************************************************** Graphic on Q1 production by region: http://link.reuters.com/nyq57t *********************************************************** Some of the other regional performances might appear surprising at first sight. The next two highest-growth regions in the first quarter, for example, were Africa, up 8.6 percent, and North America, up 3.4 percent. Production in the Gulf, which everyone knows is where new capacity is coming on line, grew by "only" 3.1 percent in the same period. So, what is going on? It's worth recalling events in both Africa and North America this time last year, in particular the part-outages of two major smelters. Rio Tinto's RIO.L 435,000-tonne per year Alma smelter in Canada was hit by a union lock-out following failed labour talks, while BHP Billiton's BLT.L 710,000-tonne per year Hillside plant was partly knocked out by technical problems. Both are now back at pre-incident run-rates, according to both companies' Q1 production reports. This normalisation is captured in those sharp year-on-year regional growth rates over the first three months of 2013. On the flip side of the ledger, some of the sharp drops in output in other parts of the world are equally backward-looking, reflecting the status quo before the last major tranche of production cuts in the Western World. THE PAIN GAME In broad brush terms, the two key trends over the first quarter were gently rising output in the world outside of China and higher Chinese production, even if the magnitude of the latter is open to interpretation. And in both cases the market price is saying that too much aluminium is still being produced. Smelters in the West are receiving life-support from high physical premiums, a by-product of the stocks-financing trade. Smelters in China, or at least some of them, are receiving life-support from regional and national subsidy schemes, the latter in the form of "strategic" purchases by the State Reeserves Bureau. True, there are reports of accumulating capacity closures in China even with such state intervention, a reflection of just how financially desperate is the plight of some. But up to four million tonnes of new capacity is poised to enter the Chinese market this year, a tidal wave that may swamp any rationalisation of older smelters. ID:nL5N0D24QV Outside of China, meanwhile, cutback announcements remain conspicuous by their absence with the notable exception of UC RUSAL and there is far more than meets the eye to that company's proposed 300,000 tonnes of curtailments. ID:nL6N0BXCRD The producer pain game, it seems, must go on because it's hard to see how the price is going to recover significantly any time soon. STILL WAITING ON CHINA The signs of that pain are just about everywhere, from U.S. producer Ormet's ORMTQ.PK filing for bankruptcy protection ID:nL4N0BQ17K to Chinese giant Chalco's heavy financial losses. ID:nL3N0CJABC With prices once again floundering at historic lows, more forced capacity closures look inevitable. Focus will inevitably be on higher-cost production areas such as North America and Western Europe. U.S. producer Century's CENX.O warning it may close its Hawesville smelter in Kentucky ID:nL2N0D32HM is a timely reminder that any rebirth of the U.S. smelter sector on the back of the shale gas revolution is going to have to be mediated through legacy, often uncompetitive contracts between individual smelters and power suppliers. The more likely short-term scenario both in that country and elsewhere is a continued attrition of higher-cost capacity. None of which will make any difference if Chinese players bring on anything like the amount of capacity being talked about. Resolution of global over-capacity and over-production is still primarily a Chinese problem, just as it has been for many years now. There are just the first tentative signs that even Beijing is now waking up to this fact. Might the latest idea of supporting "green" smelters and punishing "dirty" smelters be the long-awaited silver bullet? ID:nL3N0CZ1KL It's just possible, although the devil will be in the detail of deciding what exactly qualifies as a "green" smelter. But even the formulation of the "green" list is going to take time, possibly "within this year", according to one attendee at the meeting between smelters and the Ministry of Industry and Information Technology. At these prices many aluminium producers don't necessarily have a year. The long war of aluminium attrition is, like global output, simply going to grind on. (Editing by William Hardy) ((andy.home@thomsonreuters.com)(Tel: 44-207-542-4412)) Keywords: COLUMN HOME/ALUMINIUM