Chalco’s Aluminum Production Capacity Cuts Raise Prices: A Buy Signal?

The LME Aluminum cash price has exceeded $100 per ton during the last 10 days as a result, it is widely quoted, of smelter closures – particularly in China.

According to an FT report last week, Chalco, the Chinese state aluminum company, announced that it planned to temporarily close down 380,000 metric tons of production capacity – or one-tenth of its total output. In a filing, the company said it had decided “to exercise flexible production on part of its aluminium production line” as a result of “current market conditions.”
Sounds good, doesn’t it?

But then again, Chalco, as a state enterprise, is more often promoting a public relations or political message than a commercial one.

Aluminum Prices and Physical Premiums
The firm is certainly struggling at current aluminum prices: in April and May, the price was in the mid $1,800s per ton, yet China’s producers are, on average, facing a breakeven point above $2,000.

Nor do Chinese producers enjoy the physical aluminum price premiums Western producers are earning. China’s primary metal market is partially isolated from the world market behind export tariffs, dissuading producers from selling their metal outside the country.

Chalco’s Smoke Signals
Paul Adkins of AZ China, a consultancy specializing in the country’s aluminium sector, is quoted by the FT as saying that Chalco’s announcement was “probably a flagship action on their part, pretending to set an example to the rest of the industry.” Even so, the firm estimated in April that some 700,000-800,000 tons of aluminum production had been shut down so far this year, although that had largely been offset by increases in capacity in other parts of the country.

All in all, probably more posturing than a growing trend among producers to tackle the issue of oversupply. Most closures in recent years have been among Western firms, such as Alcoa, in which cases power costs have made aluminum production in certain regions no longer economic at prevailing prices such as western Europe and Australasia.

A Lasting Price Trend?
Although aluminum prices outperformed other LME metals over the last week, the rally is not expected to last. Chalco’s closures may not be permanent, particularly if prices were to rise any further.

VTB Capital analyst Andrey Kryuchenkov is quoted in Reuters as saying “I think this price rise will be only temporary, because stockpiles of aluminum are plentiful.”

Not time to panic buy just yet.

by Stuart Burns