Column: China draws in aluminum as domestic output shrinks

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China’s imports of primary aluminum jumped to a one-year high of 110,700 tonnes in November in a significant reversal of the recent trend.

The country flipped to net exporter in the first half of 2022, with primary metal shipped as far as Europe and the United States to capitalise on sky-high physical premiums.

The premiums are now much reduced. That for duty-unpaid in Europe collapsed from over $600 per tonne in May to a current $250 over the London Metal Exchange (LME) cash price.

While European smelter output declines under the weight of high energy prices, the region is also bracing for a recessionary hit to demand.

China appears to be taking up some of the slack as its own production momentum stalls just as the country tries to open up from quarantine and lockdown.

China's imports and exports of primary unwrought aluminium
China’s imports and exports of primary unwrought aluminum

Trade flows flip again

China’s primary aluminum export surge has passed. Outbound shipments totalled 190,000 tonnes in the first eight months of the year, the highest volume of exports since 2010.

Exports have since shrunk to 5,000 tonnes over the September-November period with high-volume shipments to Europe and the United States replaced by a trickle of material to African destinations.

Until last month, imports had been subdued relative to a previous couple of years and largely comprised Russian metal shunned by Western buyers after Russia’s “special military operation” in Ukraine began in February.

Russian imports hit a fresh 2022 high of 56,000 tonnes in November but its share of imports dropped to 51% from 85% in June. The balance was sourced from a range of countries, suggesting more Chinese pull than Russian push.

It’s worth noting that China’s imports of unwrought aluminum alloy have remained consistently strong at around 100,000 tonnes per month since a structural shift higher in 2019.

The step change coincided with a slump in imports of aluminum scrap ahead of a planned ban in 2020. The ban was pulled at the last moment and replaced with tighter purity thresholds.

Scrap imports have since rebounded, up 60% so far this year, but without any impact on alloy flows.

Global aluminium production monthly change annualised
Global aluminum production monthly change annualized

Slowing momentum

China’s renewed import appetite for primary aluminum looks at odds with the combination of lockdown-weakened demand and strong domestic production growth.

Headline national output was up by 7.2% year-on-year in November with cumulative production up 3.1% in the first 11 months of 2022, the latest estimates by the International Aluminium Institute (IAI) showed.

However, the year-on-year comparison is accentuated by a low base in the closing months of 2021, when multiple producers were forced to reduce run-rates during a rolling energy crunch.

Expressed in terms of annualized production, China’s collective run-rate has dropped by almost 1.2 million tonnes since August. That’s not as much as the 2.0-million tonne decline in late 2021 but still a significant dissipation of the early-year production surge.

Energy is again the culprit.

Although there are no national blanket power restrictions over the winter heating season this year, provinces have delegated powers to manage their local power balances and the smelter hits have been mounting up.

Sichuan briefly rationed power to industrial users, including aluminum smelters, in August because of a protracted drought in the hydro-rich province.

The following month Yunnan ordered its smelters to reduce operating rates by 10% for the same reason, lifting the mandate to 20% in October.

Last month saw several smelters in Henan province reduce output by 10% on a combination of weak market conditions and pressure from local winter heating restrictions, according to consultancy AZ Global.

The seasonal power pressures have spread to the province of Guizhou this month with local smelters taking cuts of up to 31% of capacity, AZ Global reports.

Guizhou is a relatively small aluminum province with an annual production of around one million tonnes but Yunnan is a growing hub of production on the basis of its green energy credentials.

Hongqiao, China’s largest private operator, is undeterred by this year’s power constraints and is moving more of its capacity there.

However, the concentration of smelters in Yunnan and Sichuan leaves China’s domestic supply chain facing a new source of instability in the form of seasonal rainfall levels.

Shift to surplus

The scale of the cumulative production hit in China has been masked by impact of rolling lockdowns and a foundering property sector on domestic demand.

The partial lifting of covid-19 restrictions, although fraught with the danger of a wave of Omicron infections, is expected to revitalize Chinese growth over 2023.

Any recovery impetus will require an aluminum restock. Visible inventory on the Shanghai Futures Exchange has slumped by 71% since the start of January and at a current 92,373 tonnes is around the lowest levels since 2016.

It is too early to say if last month’s jump in imports is an early sign of domestic recovery in the aluminum sector but it signals a shift in market flows.

The Western deficits earlier this year attracted significant volumes of metal from Asia, including China. The supply-chain tension has accordingly eased and the market focus has shifted to weakening demand and the potential for large amounts of aluminum to head to LME warehouses.

The east-west pendulum is swinging back again and it’s China that looks de-stocked and in need of some top-up metal from the spot market.

How much will depend on how China’s many provincial authorities balance their power systems over the next few winter months.

(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)

(Editing by Barbara Lewis)

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