China's aluminum glut set to continue

Amid concerns over China's export push, aluminum prices hit a 6-year low of $1,506 per ton on the London Metal Exchange in late August. The commodity will likely have no choice but to remain top-heavy, unless global output declines in aluminum producing nations other than China.

Mixed signals

Speculations regarding consolidation moves among major aluminum smelters are now doing the rounds in China, due to the country's excessive production of aluminum. Industry sources now say a merger between state-owned enterprises -- Aluminum Corp. of China and State Power Investment -- is most likely to happen.

The Chinese government has begun moving to reform state-owned enterprises, promoting mergers and acquisitions among them. The industry's realignment will help control the country's production capacity, possibly improving the supply-demand balance for aluminum. However, an official at a major trading house said, the aluminum market is unlikely to improve so easily. Many market insiders support this view.

cording to Chinese think tank Antaike, China has aluminum production capacity of roughly 40 million tons in 2015. The figure accounts for about 70% of the estimated global output, and it is also well above expected global consumption by 9 million tons. Some estimate that China will become capable of producing up to 51.5 million tons of aluminum in 2020.

China has recently been shifting more production from the country's populated coastal areas, where electricity costs are high, to the Xinjiang Uighur Autonomous Region and other low-cost inland areas. Aluminum is a key material for military use. To this point, the country needs to secure domestic production. As a consequence, many projects to construct smelters were approved in the past, thanks to the government's economic stimulus measures after the onset of the 2008 global financial crisis.

What lies ahead?

It would not be surprising if smelters in coastal areas were forced to shut down. But the story is not so simple. Local governments hold stakes in such smelters, and closing down these facilities would negatively affect employment. In 2015, China's aluminum production will increase by 4 million tons, mainly in inland areas, but closures of smelters will reportedly reduce the country's total output only by 500,000 tons.

As long as a supply glut remains in that country, Chinese companies focus on exports. China's aluminum product exports rose 20% on the year to roughly 3.2 million tons in the January-August period.