China’s aluminium shipment up despite winter capacity cut; supply reforms expected to repeat in 2018

Ning Jizhe, the VC of the National Development and Reform Commission (NDRC) has recently announced that China will continue to cut aluminium capacity in 2018, and it would be market-based, standard, and prevent rule violations. This indicates the supply side reforms and environmental cuts would repeat in 2018, though not specific policy has been announced.  

The recently published data from China Customs show China's exports of unwrought aluminium and aluminium products dropped to 372,000 tonnes in February from 445,000 tonnes in January.  On the other hand in the first two months of 2018, China’s exports of unwrought aluminium and products rose 26% to 817,000 tonnes.

February drop is also partially due to the Chinese New year holidays. The rise in aluminium shipments in Jan-Feb suggested winter production cuts by Beijing to control pollution had not been as effective as expected. This is further supported by climbing inventory and falling aluminium and raw material prices in China.

China’s total exports unexpectedly surged in last month, suggesting its economic growth remains steady despite the disturbed trade relations with the United States.

“The increase is worth noting because it happened while there has been industrial cuts in China. It suggests the cuts may not have been so effective,” said Vivek Dhar, analyst at CBA in Melbourne.

Shipments started increasing with the start of winter capacity cut in November creating a favorable arbitrage to the LME price and encouraging producers and fabricators to seek better margins abroad while domestic prices were falling. Producers were in a hurry to ship as much volume to the U.S. expecting the impeding final decision on import tariff in the first quarter of 2018.

Climbing inventory, slow downstream demand and weak aluminium prices have given smelters from Shandong to Shanxi pause as the end of winter approaches. But they would face competition from new, mostly state-owned smelters in regions not subject to output curbs. Some 3 million-4 million tonnes of new capacity is set to come on line this year, or about 10 per cent of the country’s current output, according to a survey of analysts. Provided that the domestic downstream market also picks up well, the inventory will move. Otherwise, there is still the fear of overcapacity looming large because of the newly imposed tariffs on aluminium import by the U.S.