Factors that Push Both Aluminium Stock and Prices
Let’s have a look at the Raw Aluminium Supply Sheets for the last couple of years in China. From 2013 to 2015, the domestic raw aluminum production volume is 25.1 million tons, 28.2 million tons and 30.8 million tons respectively, plus some net import, the actual supplies are 25.32 million tons, 28.23 million tons and 30.83 million tons respectively. Consumption volume of raw aluminum is 24.97 million tons, 27.91 million tons and 30.31 million tons respectively. Supplies of raw aluminium are obviously larger than demands by 300,000 to 500, 000 tons more or less.
The reason is that the global economy was suffering from the former international financial crisis and is not recovering ever since. Domestic demand is increasing at such a low speed that for some industries supplies are much more than demands. Not only the traditional industries have this kind of problems, high consumption and high emission industries like iron, cement and electrolytic aluminium are more serious. Take electrolytic aluminium industry in China for example, by the end of 2012 the production capacity utilization ratio is only 71.9%, obviously lower than the international common level.
Electrolytic aluminum industry was our country’s basic vital industry. But as it consumed a lot of electricity during production, it had always been called “high consumption industry”. In October 2013, The State Council announced that electrolytic aluminium industry was under key regulation and the key industry to defuse excess capacity. By the third season of 2015, electrolytic aluminum industry factories were facing extensive losses. Most factories had difficulty in running the business. At that time the production capacity for cost lower than 11,000 yuan/ton accounted for 3% of the national capacity. Capacity for cost between 11,000 and 11,500 yuan /ton accounted for 28%. Although the whole industry was trying to reduce the capacity, the capacity did not reduce a lot. The production capacity reduced by over 2 million tons nationwide, but meanwhile the new production capacity was invested by over 3 million tons. The reduced part is not as big as the newly added one. Among them, five cities’ stock aluminum ingots surpassed 1 million tons in total. They are Shanghai, Wuxi, Hangzhou, Nanhai and Gongyi, whose aluminum production accounted for 90% of the whole country. The heavy burden of stock led to the dramatic drop of aluminum price back to the level of the last century’s at the end of 2015
In 2016, the first year of the structural reform of supply-side, things have reversed.
Firstly, in order to save the cost, some domestic smelting plants cooperated with the aluminum processing factories by supplying aluminium water directly. It was said this would save about 800 yuan per ton for the cost of producing aluminum. For electrolytic aluminum factories that were suffering from serious losses this high “profit” had stimulated them. And quite a lot of traders supposed that aluminum ingot would have tight supply and they intentionally stock aluminum ingot resources.
Secondly, in 2016 the real estate market started to boom. The consumption of aluminum became strong unexpectedly. While excessive production capacity could not recover due to the issues of capital, environment policy, etc. As a result, with the coming of busy season, aluminum ingot stock dropped dramatically from 1 million tons during the Spring Festival of 2016 to 200,000 tons in October 2016, creating the record low in history. Under such circumstances, aluminum prices finally come to the rise that lasted for several months long.
Thirdly, since 2017 the international nonferrous metal prices has risen sharply induced by the Trump Infrastructural Plan, which led to the double boom of ferrous metal in the domestic market. The prices of nonferrous metal like copper, aluminum, zinc, nickel began to rise accordingly. Some speculators for spot goods and futures market started marketing hype. In the meantime, the Federal Reserve’s continuous interests rate hike has formed the future inflation expectation in the market.
With the influences of all these factors, aluminum prices increased from less than 10,000 in 2015 to 13,000 in late 2016. The market was warm completely. Many excessive production capacity returned to production again. By mid September 2016 the aluminum ingot stock in 13 cities like Shanghai, Wuxi, Hangzhou, Foshan, etc. has quickly risen to 1.6 million tons, 5 times more than that of the same period, creating the new record high for aluminum ingot stock since 2010. And the aluminum prices have inadvertently approached 17,000 yuan per ton.
Rise of Production Cost is the Key Reason for Aluminum Price Increase
What is the inner reason that makes the aluminum prices rise rapidly in such a short time?
As we all know, electrolytic aluminium gets the aluminum by electrolysis. Nowadays for electrolytic aluminium industry, production materials mainly include alumina, cryolite, aluminum fluoride, additives and carbon anode. The production consumes a lot of electric power and fuel oil. According to estimates, alumina and prebaked anode account for 50% of the material cost. The production of electrolytic aluminium uses a lot of electric power. At the moment to produce one ton of electrolytic aluminium consumes about 13,500 kWh of electric power. Power cost accounts for 30-40% of the total cost. Besides, there are labor cost, management cost, transportation cost, and so on. In recent years, China has been improving the environment protection standards. The requirements for eliminating harmful gas, solid dust and purification treatment are getting higher and higher.
Since 2017, many raw materials have been self adjusting from 2011 to 2016. The production capacity and supplies for most raw materials of electrolytic aluminium have been undergone substantial contraction. According to some insiders, by August 2017 98.5% of alumina has witnessed the average price increase by 50.4% nationwide compared with that of the same period last year. Thus it increased the electrolytic aluminium cost by 1840 yuan per ton. 61% of aluminium fluoride has increased by 47.4%, bringing up the cost of electrolytic aluminium by 68.75 yuan per ton. 96% of prebaked anode has increased by 50.5%, bringing up the cost of electrolytic aluminium by 637 yuan per ton. Carbon prices are also rising all along. The fact that the shares of listed company Fangda Carbon rose from 9 yuan to 40 yuan per share is the proof for that.
Therefore, the whole raw material cost for producing aluminum has risen by 2500 yuan per ton compared with that of last year. If we consider the high power cost, increasing labor cost and additional strict environment protection cost, the aluminum price of 13000 yuan per ton is the right balance point for profit and loss.
So it is not strange for the rapid increase of aluminum prices due to the large scale increase of raw material cost.
What will be the trend for future aluminium prices?
What will be the trend for future aluminium prices? Will aluminum stock stay high? The answers to these questions depend on the effect of the supply-side reforms in the aluminum industry
With the strict implement of reducing excessive production capacity and environmental policy, it is estimated that over 5 million tons will be reduced the whole year.
According to Asian Metal data, the newly invested electrolytic aluminium production capacity in 2017 will be around 4.45 million tons. By August the newly invested and recovery investment on electrolytic aluminium production capacity has reached 3 million tons. Basically the production supplies are stable. For the moment the reform of supply-side is effective, the upstream supplier’s profit is recovered, and low-end high pollution capacity is basically eliminated. Insiders generally believe that the stock of aluminum is enough to guarantee the supply, and more changes will be reflected on the stock of aluminum.
So the price trend for the aluminum market for the fourth season and next year is: the domestic stock may reduce, but with the use-up of the present capacity replacement quota and new capacity approval limited by policy, the aluminum demand will keep a vigorous situation. At the same time, raw materials, electric power and labor cost have sealed the bottom of the aluminum cost. The possibilities of aluminum price drop are very small.