Capacity swap kept aluminium inventory high in China; to put pressure on aluminium price in Q1 2018

One of the reasons China’s total aluminium capacity has not seen a substantial drop despite the winter cut is because China’s smelters are making use of ‘capacity swap quotas’. While announcing winter closure, smelters were directed to close excess/unused capacity or sell it as a quota to others seeking to expand.  Morgan Stanley analysts said in a note. “While the strategy constrains capacity growth and boosts the industry’s utilisation rate, it is likely to see China’s total output lift too.” 

According to SMM senior analyst Liu Xiaolei there would be little impact on the capacity of primary aluminium in Binzhou, Shandong province even though the city was said to have exceeded its allowed capacity. The smelters used the capacity swap quotas and the total capacity remained almost same. On Nov.23, as per SMM statistics of domestic aluminium inventories (SHFE warrants included), total primary ingot inventory stood at 1.749 million tonnes.

He insisted on paying attention to the capacity swap and capacity increase in other regions of China.

According to SMM research, China has completed 4.16 million tonnes of refined aluminium capacity swap in 2017 and yet to complete another 1.98 million tonnes. Inner Mongolia, Xinjiang and Shanxi provinces topped the list for capacity swap. A number of smelters swapped capacity to western China, where costs are cheaper and the total capacity remained intact.

“Since the launch of production cut due to environmental production, around 1 million tonnes of refined aluminium capacity have been affected. However, this has not led to supply shortage and aluminium ingot inventory remained high,” Liu said.

He projected that increasing primary ingot inventory from end January to February 2018 is likely to put further pressure on aluminium price.