Markets Speak: Three point strategy suggested for China aluminium smelters

The huge overcapacity overhang of Chinese Aluminium in the domestic markets has forced the government to suggest some concrete steps to the smelters. China Aluminium production has increased at a drastic pace leading to supply side glut and rising LME inventories to all time highs. Facing the issue, China policy makers are suggesting a three phased approach for the Aluminium smelters.

1. The first suggestion is that Chinese Aluminium smelters should focus on shifting their domestic capacities outside China. This is likely to control the huge amount of capacities being build within the country. Although, this measure is for long term, because shifting these smelters is a herculean task.

2. Improvement in consumption is the other step being suggested by the Ministry of Industry and Information Technology (MIIT) and National Development and Reform Commission (NDRC). The increase of consumption levels in China is possible with the increased offtake by the Aluminium consumer industries like Automobiles and Power.

3. Reduction of outdated capacities will help in controlling the burden of inventories.

News reports coming from China suggest that the future for Aluminium is pretty grim. This is because of the strictness of the regulators to nab stored Aluminium in warehouses. This is expected to bring fresh amount of the stored Aluminium in local markets that will in turn crash the prices of the metal. LME three month Aluminium prices are at $ 1804 per tonne.