Chinese aluminium smelters under significant pressures: Goldman Sachs

Chinese smelters are under “unprecedented” pressures, as about half of them are losing money due to ailing aluminium prices, Goldman Sachs said in its latest research note.

"Following the recent Chinese domestic price declines, we estimate that 50%, or 11-12 million tonnes of Chinese output, is losing money on a cash cost basis, equal to almost 25% of world total supply. Of this, we estimate that all Chinese grid-based power producers - accounting for 25%-30% of Chinese supply - are losing cash at present," it said.

So far this year, Chinese domestic aluminium prices have fallen by 10%, to their lowest levels in more than 16 years, which reflects "a dramatic ramp-up in low-cost smelter capacity in North and North Western China and a lack of closures of high-cost Chinese capacity outside these regions".

This is in contrast with gains in ex-China aluminium prices of between 3%-8% year to date amid a small deficit. And the price divergence is likely to cap the recent ex- China rally in the short term through increases in China's exports of semi-fabricated products.

"Overall, while it is still too early to be outright bullish, we believe that there are some signs that we are nearing the end of the Great Surplus...ultimately, we continue to expect that smelter closures in China will result in 2014 being the last year of the surplus for the global market in this cycle," it said.

While the investment bank said the medium-term outlook for aluminium continues to look "more constructive than it has done for many years", it still cautioned that "the risks to this outlook remain how much further support Chinese smelters receive, and broader global demand risks".

"We continue to believe that developments in China in the next three months will be more critical than ever," it added.