As overcapacity drags on China aluminium prices, product exports jump

[MELBOURNE] Overcapacity in China's beleaguered aluminium market will persist in coming months, weighing on local prices and boosting the appeal of shipping aluminium products overseas, traders and analysts said.

Increased product exports will help plug a supply deficit in the West, but will also fuel competition with Western producers. Exports from the world's No 1 aluminium miner are already dragging on premiums - the cost of obtaining physical metal - in Asia.

"We certainly expect low (Chinese) prices to continue," said Paul Adkins, managing director of Beijing-based consultancy AZ-China. "What drives the Chinese aluminium industry is not market economics but debt. And for as long as you need to service debt, you'll keep the plant running."

Overcapacity has ballooned as local governments subsidise power costs for aluminium producers that are significant contributors to GDP.

AZ China estimates that more than half China's capacity is currently operating at a loss, even after the subsidies. It sees a domestic surplus of around 1-1.3 million tonnes this year.

ShFE aluminium prices have hit a string of record lows already in January, falling to 12,685 yuan (US$2,045) a tonne on Tuesday, the lowest since 2005, and down more than 16 per cent from mid-September.

Meanwhile, China's exports of aluminium products grew about 19 per cent last year, a trend analysts expect to continue in 2015, given low local prices compared to international markets.

China's exports of unwrought aluminium and aluminium products, jumped 38 per cent in December to 540,000 tonnes from 390,000 tonnes in November, data showed.

Primary aluminium attracts a 15 per cent export tax in China, effectively shutting down exports, although semi-manufactured products such as rolled products receive a 13 per cent rebate, helping make value-added exports profitable.

Aluminium shaped as continuous cast coils can be remelted at destination, effectively becoming a substitute for primary material, noted Bank of America Merrill Lynch.

"We estimate that China's token semi exports (ie semis that are being remelted) could reduce this year's 1-million tonne market deficit in World ex-China by up to 450,000 tonnes," the bank said.

A trader in Singapore said that some Indonesian buyers were importing Chinese coils and plates. He added that Asian markets were well supplied and regional premiums were likely to fall.

Low prices will encourage some Chinese capacity to close, however. China consultancy Antaike estimates close to 400,000 tonnes of aluminium production has been curbed since the end of last year.

Alcoa Chief Executive Officer Klaus Kleinfeld this week played down concerns about Chinese supply flooding the market, saying it was unlikely that China, the world's top consumer, would remove the export tax for primary aluminium.

But he added that the global metals company was monitoring China's increased activity in the trade of semi-finished products "very, very closely".

REUTERS