China?s Smog Efforts Will Not Change Aluminum Market

Posted by Bob Davis on February 25th, 2017

China is one of the top producers of aluminum in the world. They are also taking considerable measures to combat pollution. This battle against pollution has increased output cuts to a noticeable degree. This has caused prices to rise to highs that have not been seen in some twenty months. However, some believe that the rally has ultimately gone too far, as oversupply continues to remain a problem.

Market excitement was created through a Chinese document suggesting that cutting down a third of the aluminum capacity through provinces such as Shandong, Henan, Hebei, and Shanxi should be shut down through the coming winter months. In doing so, the battle against smog would take a significant turn, particularly in Beijing.

Of course, the issue is not as simple as the above statement might suggest.

Changes To The Aluminum Market?

As mentioned before, the measures suggested above could prove to be extremely beneficial to Beijing’s efforts to battle smog and other pollutants. Many firms burn thermal coal to create the electricity that is necessary for the work. In China, this accounts for between twenty-five and forty percent of the costs involved in creating aluminum.

Prices are currently in the 1800.00 range. This is quite high above the average forecast of 1685.00. The market surplus for this year and next is expected to be somewhere around three hundred thousand tons. If these changes are implemented, the cuts would remove three or four million tons from the forty million tons of capacity in China. The draft also makes mention of the next heating period, during which the four months from November are considered. Global demand would be reduced by a mere fraction of the current estimate of sixty million tons this year.

Global inventories, which are estimated at around ten million tons, would cover this shortfall. However, keep in mind that a new energy efficient capacity of two million tons is going to come into China this year. Essentially, the plan is to cover the dirty capacity.

China recently passed a law that will give them the ability to utilize environmental protection taxes from 2018. As a general rule, it is worth noting that the companies compelled with the task of improving their approach to responsible environmental practices are given a grace period. During this grace period, they will be given time to meet the environmental demands being put forth by the government, before they are shut down for good.

At the same time, there aren’t any decisions that are going to be made before plenum/annual meeting of the Communist Party in October. When that meeting occurs, the party is essentially going to decide who will be responsible for governing China for the next several years. As one can imagine, the Communist Party doesn’t want to do anything that might disrupt the economy in the months prior to the plenum. It seems reasonable to assume that the party wants things to run as smooth as possible before they come together to decide who will run things next.