LONDON (Reuters) – China’s winter heating season has arrived and the aluminum market is still struggling to work out what impact it will have on the country’s production.
The question returned again and again at last week’s ARABAL conference in Oman but consensus answer came there none.
Capacity will certainly close as part of the government’s drive to improve air quality in the region around Beijing. But potential offsets both from earlier “illegal” capacity closures and from higher output in unaffected parts of the country make the exact calculations fiendishly difficult.
In London three-month aluminum is trading around $2,120 a tonne, some way off the five-year high of $2,215 hit earlier this month.
That suggests the market is taking a slightly more relaxed view about the size of the looming production hit, particularly in light of rapidly building stocks on the Shanghai Futures Exchange.
However, attention is now turning to the knock-on impacts of the winter industrial capacity cuts on key raw materials in the aluminum smelting process, particularly alumina and carbon anode.
Both have recently jumped in price and both featured heavily in last week’s discussions, both on and off-stage, in Oman.
Carbon anode was already a ticking time bomb for aluminum smelters, but one over which they have little control.
The disruptive impact from alumina price volatility, by contrast, is to some extent a self-inflicted injury after a collective shift in pricing methodology.
Graphic on relative price performance by aluminum and alumina: tmsnrt.rs/2zSMOrb
END OF THE NATURAL HEDGE
The London aluminum price has climbed by almost 25 percent this year.
Alumina, the key metallic input to the smelting process, has jumped by almost 50 percent to about $465 a tonne.
It, too, is reacting to the potential for significant capacity closures in the most smog-prone parts of China.
As with the metal link in the supply chain, nobody is quite sure how much alumina will be lost over the coming winter heating months. Alumina demand, meanwhile, is a function of smelter operating rates, embedding the alumina price between two “known unknowns”.
Until very recently, alumina price volatility wasn’t a big deal for aluminum smelters, even though it is one of their most important costs along with power.
That’s because, outside China at least, most of them had alumina supply contracts linking the price to that of primary aluminum.
It was, as Ali Al-Baqali,…