Chinese exports damp aluminium rally

The recent rally in the price of aluminium has lost momentum as Chinese exports of the lightweight metal continue to hit the market.

Aluminum for three-month delivery on the London Metal Exchange has fallen 5.7 per cent since it almost reached $2,000 a tonne at the start of the month. On Friday it was trading at $1,857 a tonne, down $11.

The market is struggling to digest record production in China, the world’s largest producer. Data released this week showed exports of aluminium, used in everything from drinks cans to motor cars, rose 40 per cent in the first four months of this year, hitting a new record in April.

That is putting pressure on producers such as Russia’s Rusal and Alcoa, which are cutting capacity.

“The major western producers will need to continue efforts to ensure they are bottom quartile producers because at this rate there is not going to be any help from the price,” said analysts at Investec.

Last year’s market deficit outside China of 1.2m tonnes is now about 1.5m tonnes, according to Rusal estimates. But Chinese exports could close that gap.

“Increased Chinese output, and the leaking out of that material to the wider world, has continued to impact on sentiment and physical premia,” said Leon Westgate, analyst at ICBC Standard Bank, referring to the extra cost for physical delivery of the metal.

Smelters in the country are continuing to add capacity despite weak domestic demand as the economy slows.

Chinese installed aluminium capacity rose between January and March to 35.8m tonnes, according to Rusal, which reckons about half of the industry is lossmaking at current prices.

Amid signs of overcapacity, China last month cut export taxes on certain types of aluminium rods and bars. It also gives a tax rebate for exports of semi-finished aluminium, which companies say can be turned back to primary metal outside the country. In contrast, exports of primary aluminium are hit by a 15 per cent tax.

Exports of semi-finished aluminium from China rose at a compound annual growth rate of 28.4 per cent between 2008 and 2014, according to consultancy CRU.

On Thursday, the European Commission said it had launched an investigation into claims that China and Russia had been selling a type of steel — cold rolled coil — below market cost in the EU.

“With a growing list of investigations under its belt, the EC appears to be becoming increasingly responsive to industry pleas for more protectionist policy. However, with Chinese exports set to continue to rise, we are not out of the woods yet,” said Jefferies analyst Seth Rosenfeld.

Premiums for primary aluminium, which give an indication of supply for end-consumers, have halved in Asia since March, according to Reuters. They have also fallen this year in Europe and the US.