(The opinions expressed here are those of the author, a
columnist for Reuters.)
* China's imports of bauxite: https://tmsnrt.rs/2SN2ILP
* China's exports of aluminium products: https://tmsnrt.rs/38Pgjb0
By Andy Home
LONDON, Feb 21 (Reuters) - The outbreak of the deadly
coronavirus could not have come at a worse time for the
aluminium market.
Global aluminium demand fell last year for the first time
since the global financial crisis.
Expectations of a demand recovery rested on China, which
showed encouraging signs of a manufacturing revival towards the
end of 2019.
The virus and the accompanying quarantine measures have
since chilled economic activity, representing a short-term
demand shock for the world's aluminium market.
It's why the London Metal Exchange (LME) aluminium price
sank to a three-year low of $1,685 per tonne at the
start of February.
The fear is that China's aluminium smelters will keep
churning out metal even as the country's demand implodes.
Since China is the world's largest producer of primary
aluminium, accounting for 56% of global output last year, this
could have huge ramifications.
At the same time, China's complex production logistics chain
is undergoing massive stress and a supply shock is building
upstream.
DEMAND SHOCK
Aluminium usage is highly exposed to the construction and
transport sectors, meaning a double short-term hit to end-use
demand.
Chinese construction activity is being hampered by
quarantine restrictions on workers returning from Lunar New Year
holidays.
Already weak automotive sales look set to collapse over the
coming months. Passenger car sales slumped by 92% in the first
half of February, according to the China Passenger Car
Association.
The more immediate concern is China's aluminium processing
sector, which converts metal into semi-manufactured products.
Most fabricators tend to close their plants or at least run at
reduced rates over the holidays.
Many are yet to restart, being in locked-down quarantine
zones.
This processing chain disruption is causing a sharp build in
aluminium stocks registered with the Shanghai Futures Exchange
(ShFE).
ShFE inventory has surged by 224,508 tonnes to 409,635
tonnes since the start of January. Increases over the new year
holidays are the norm in China but the seasonal January-February
build was a mild 75,000 tonnes last year and 88,000 tonnes in
2018.
Arrivals have been concentrated at exchange depots in
Jiangsu and Henan provinces, with registered tonnage in Shanghai
at a multi-year low of 10,218 tonnes.
That suggests a high level of regional divergence resulting
from dislocated physical supply chains.
But the broader build in visible stocks is a warning sign
that first-stage demand from the processing sector is failing to
experience the "normal" post-holiday pick-up.
China's smelters, meanwhile, don't take holiday breaks. A
smelter is not easily switched on and off and doing so costs
money.
Chinese production slid by 2% last year but picked up
strongly at the start of 2020.
National output in January surged by an annualised 425,000
tonnes relative to December and at 36.3 million tonnes
represented the fastest run-rate since December 2018, according
to the International Aluminium Institute.
The disconnect with weak demand is likely to become ever
more severe this month, raising the prospect of a massive
inventory build.
This is a recurring nightmare for the aluminium market,
which has spent much of the last decade working off the stocks
accumulated during the global financial crisis of 2007/08. Then
too demand collapsed but smelters carried on producing fresh
metal.
SUPPLY SHOCK
However, China's giant smelter sector is itself dependent on
both domestic and international raw material supply chains.
The country's build-out of smelter capacity has made it ever
hungrier for imports of bauxite from countries as far afield as
Guinea and Ghana.
Imports of bauxite, which is converted to alumina to make
aluminium, reached 101 million tonnes last year, a record high.
That flow of material is now also disrupted. Port stocks of
bauxite have risen by around 5 million tonnes since the start of
the year even while alumina refineries in Henan and Shanxi
provinces are drawing down stocks to ultra-low levels, according
to research house Wood Mackenzie. ("How is the coronavirus
affecting China's aluminium market?" Feb. 14, 2020)
Some alumina refineries are also running short of other key
inputs such as caustic soda, while others can't ship their
product to smelters, particularly distant plants in northwest
provinces such as Xinjiang, according to Woodmac.
It estimates that "in the span of 12 days refining cuts in
China have reached 5.2 million tonnes (annualised), representing
7% of the country's estimated production."
The domestic alumina market is forecast to experience a 1.1
million-tonne deficit in the first quarter.
This may well lead to smelter cuts, according to analysts at
Goldman Sachs, although they expect the country's production
growth to slow not halt over the coming period. ("The impact of
2019-nCoV on industrial metals," Feb. 14, 2020)
SUPPLY CHAIN SHOCK
Goldman is sticking with its already bearish price forecasts
of $1,700, $1,650 and $1,675 over a three, six and 12-month time
horizon.
The bank's views chime with a broad consensus that the
likely aluminium demand shock is going to be more immediate and
more severe than any ensuing supply shock.
That's preventing the LME price staging any significant
bounce from the early-February low. On Friday it was trading
just above there at $1,705.
However, China's physical aluminium processing chain itself
has been shaken, which may translate into different outcomes at
different stages of the value chain.
The disruption to China's alumina sector, for example, might
well stimulate higher demand for imported alumina, "as this can
be railed from the port whereas intra-province truck delivery is
severely constrained," notes Woodmac.
The research house estimates China imported 400,000 tonnes
of alumina in January and "is on track to import similar or
higher tonnages in February."
China's exports of semi-manufactured products, meanwhile,
might well fall sharply over the coming months due to the
constraints on many fabricators.
Exports last year were around 5.2 million tonnes, down
slightly on 2018 levels as Chinese companies faced increased
trade hostility in the form of tariffs.
A drop in outbound product flows might even be greeted with
relief by the rest of the world's aluminium industry.
But that shouldn't mask the scale of the potential
short-term disruption to the global market.
The demand shock is already unfolding. A supply shock may
yet follow.
(Editing by Susan Fenton)