(Beijing) — China’s aluminum industry is being hit by a double whammy — forced closures of unapproved plants to curb overcapacity and heavy cuts in production over the winter months to ease choking pollution. But the bad news has been good news for investors, speculators and some companies.
The price of the metal, which is used in a wide range of industries including aerospace, construction and packaging, has surged in domestic markets as speculators anticipated a repeat of the bull market already seen in coal and steel after the government ordered cuts in capacity and output in those industries. Aluminum traded on international markets has risen on China’s coattails on expectations that the curbs imposed in the world’s largest producer of the metal will push global prices higher.
The spot price of Shanghai-traded aluminum broke through the 15,000 yuan ($2,270) mark for the first time in nearly nine months in early August and jumped to an almost six-year high of 16,610 yuan per ton last Thursday. Aluminum for three-month delivery on the London Metal Exchange has increased 11.5% since the beginning of August and hit $2,177 a ton on Sept. 20, the highest in five years.
“The current market boom is not being caused by (changes in) the relationship between supply and demand,” Wang Qiang, an industry insider close to policymakers, told Caixin. “It’s being caused by speculation funded by borrowed money.”
The trigger for the rally appears to have been media reports in early August that China Hongqiao Group, the world’s biggest aluminum producer, had shuttered five unauthorized plants with combined capacity of 2.68 million tons on the orders of the Shandong provincial government. The privately owned and indebted company, whose Hong Kong-listed shares have been suspended since March amid allegations of overstated profits, finally confirmed the speculation in an Aug. 15 statement and said the affected plants accounted for 29% of the group’s total aluminum capacity.
Aluminum Corp. of China (Chalco), the Hong Kong-listed unit of the country’s biggest state-owned aluminum producer, issued a statement on Aug. 9 warning of “investment risks” after the spot price of aluminum in Shanghai jumped by 4.03% that day, the largest one-day increase in nine years. In the six trading days through Aug. 9, the price had jumped by 10.7% and Chalco’s shares had soared by 23% to HK$6.01 (77 U.S. cents).
“National policies have been…