China aluminium recovery not imminent despite consolidation

The Chinese aluminium industry is not expected to recover in the near term - even though the number of aluminium producers has fallen - because industry fundamentals are likely to remain weak for the foreseeable future.

China's Ministry of Industry and Information Technology recently released lists of Chinese aluminium producers that comply with industry regulations, which showed the industry has consolidated rapidly.

There were 31 producers with total annual capacity of 29.85 million tonnes (Mt), or 80 per cent of national capacity, as at the end of October 2014, compared with 91 producers in 2013 and 120 producers 10 years ago.

The 10 biggest producers now account for 77 per cent of the 29.85Mt of consolidated capacity, while the 20 biggest account for 95 per cent. It is believed that despite the consolidation, the recovery of the sector is not yet in sight.

Large amounts of capacity will be added this year: It is estimated that over 5Mt of aluminium production capacity will be added this year, up 15 per cent y-o-y, mostly driven by investment in China's western region, where abundant coal resources result in cheaper electricity costs. At the same time, slower growth in real estate construction and transportation, which together account for close to 55 per cent of Chinese aluminium consumption, will result in weaker demand growth for the metal.

Production costs for aluminium are also falling as more aluminium producers are now equipped with integrated power generation facilities. This will result in overall lower marginal cost for aluminium and put more pressure on prices.