4. W i r t s c h a f t
ALUMINIUM · 12/2014 17
the only Chinese producer not making it into
the official figures.
The impact of Chinese oversupply on the
rest of the world can be assessed by using Chi-
na’s customs export figures for aluminium, to
be precise the export of semi-fabricated prod-
ucts. This has been in constant growth over
the last seven to eight years and may reach
almost 4m tonnes this year. Semis exports of
340,000 tonnes in September matched the all-
time high recorded in May 2011, while year-
to-date export growth is 10% above 2013
levels. Many analysts do not consider that
those exports, since they are products, have
an influence on the global primary aluminium
balance.
However, Citi’s analyst David Wilson
claims that China’s exports cause a double-
count in the global consumption calculation
because of the differing methodologies used
in different countries. In China they are
counted as first-use consumption. However, if
they are then exported to a country, e.g. the
United States, where better data allows the
construction of a bottom-up demand calcula-
tion, they get counted again. Moreover, there
is growing concern among analysts about the
nature of some of these exports. Is it possi-
ble that some Chinese players are performing
minimal transformation of primary metal into
basic ‘products’ to skip through China‘s export
tax regime? The primary exports are hit with
a 15% tax, while product exports qualify for
a partial VAT refund.
Arthur Fan, CEO of Boci Global Commodi-
ties, said that a slowdown in China, caused by
transition from an investment-based to a con-
sumption-based economy, and financial re-
forms and more interaction with international
markets would affect commodity markets. “In
the next years we will see quite a significant
change in the impact of China on the global
metals market,” he said.
Author’s final remarks
It is questionable how much conclusions from
this and similar events are used by big mar-
ket participants (traders, funds, etc.) to plan
their business strategy and make profits on
developments quite the opposite of what is
expected by most players on the market. It
has been seen more than once that the prices
of certain commodities moved in the opposite
direction from the consensus of analysts. For
instance, copper has the worst prospects of all
base metals as regards price development in
2015, while some leading institutions expect
China’s imports of copper to fall significantly
in 2015. What if market participants in China,
or whoever, start buying copper for stockpil-
ing and financing deals, in expectation that
the price will rise again in three to four years
from now? Then the price would not fall; it
would maybe even rise, despite the expected
surplus on the market.
In line with such assumptions, the ques-
tion is whether the aluminium price can re-
main at around USD2,000/t and premiums at
a record high (around USD500/t in Europe)
if China’s economy continues to slow down.
Most analysts would give a negative answer.
However, stagnant and even weaker economic
growth in China may result in less and smaller
bank loans, less investments, and finally less
exports of semi-finished aluminium products
from China. The export of products from
China in recent years was the main cause of
oversupplied western and world markets and
consequently capped the aluminium price. In
explicit words: despite high and even rising
demand, the aluminium price cannot move
much higher with a constant surplus on the
market due to the exports from China. The
export of semi-finished products may reach
4m tonnes this year, while at the same time
China’s primary aluminium production may
surpass demand by 1m tonnes.
This is the reason why it is not appropriate
to talk of a market deficit, even outside China.
Despite an obvious production deficit outside
China, the global market surplus will remain
until China exports more products than the
world market (outside China) can consume.
This is because granted the amount of products
exports from China, there is correspondingly
less demand from extruders and rolling mills
for primary aluminium from world smelters
(ex China). In conclusion, in the event that
China’s exports of products (presuming pri-
mary aluminium exports would remain mini-
mal too) decrease to 1m tonnes per year, or
less, even with a weakening Chinese economy,
the aluminium price would remain at current
levels or even rise slightly.
Demand from the automotive and aero-
space industries will remain high and even
grow (above all in the USA) so the main risk
for the price development is and will remain
China’s export of products. If we, for instance,
compare the situation with copper, the price is
high because China imports some 3m tonnes
of refined copper per year. The decrease in
imports this year has already been reflected
in lower LME copper prices and any further
decrease of imports in 2015 will also be re-
flected in the price. What would happen with
the aluminium price if China turns into a net
importer either of primary aluminium or semi-
finished products, some 3-4m tonnes per year,
instead of exporting that much?
Unfortunately for smelters (ex China),
but fortunately for end consumers (automo-
tive, aerospace), this will not happen in the
next two to three years at least. The current
total aluminium price including premiums at
USD2,500/t may be considered as an optimum
(state of equilibrium) for the aluminium indus-
try, satisfying all market participants: on the
one hand most primary aluminium producers
are profitable and on the other hand, the price
is affordable for downstream producers and
end consumers. Growth towards USD3,000/t
would slow future aluminium applications
and demand, while a decline to USD1,800/t
or less would force many primary aluminium
producers to close. In the long term, stable
prices are important for supporting substantial
growth in demand and new applications. This
is the reason why many consumers request
long-term contracts with fixed price and de-
livery quantities.
Another point where analysts disagree is
aluminium premiums. Many expect them to
fall next year, after LME rules for metal deliv-
ery out of warehouses are implemented. Also,
eventually a rise of interest rates and frequent
backwardation (when the price for prompt de-
livery is higher than the 3-month price, etc.)
will lead to the cancellation of financing deals,
allowing metal from warehouses to enter the
market. However, it is more likely that these
process will develop gradually over several
years and will not necessarily result in a flood
of metal onto the market and significant fall
of premiums in 2015. Metal from LME ware-
houses may be transferred to other warehous-
es, both registered and non-registered ones,
instead of arriving on the market immediately.
It is more likely that big traders and funds,
who hold most of the metal in financing deals
at warehouses (Glencore, Goldman Sachs),
will not allow large amounts of metal to reach
customers at once, but gradually, in smaller
amounts over a longer period of time. With
high and still rising demand, aluminium (and
other metals) premiums may remain at current
record high levels, or a little lower, in 2015.
Finally, Standard Bank London argued that
premium hedging contracts may also support
and prolong high premiums.
Author
Goran Djukanovic is an aluminium market analyst.
He is located in Podgorica, Montenegro. Email:
gordju@t-com.me.
