(The opinions expressed here are those of the author, a
columnist for Reuters.)
* Global aluminium production in 2020: https://tmsnrt.rs/2LN4Se1
* Global output by region in 2020: https://tmsnrt.rs/3o8n3aT
By Andy Home
LONDON, Jan 22 (Reuters) - World aluminium output rose by
2.5% to a record 65.3 million tonnes last year, with producers
lifting run-rates as the aluminium price rebounded from its
March lows.
The COVID-19 recovery has been led by China, where booming
demand has seen the world's largest producer turn net importer
of primary metal this year.
China's giant aluminium smelting sector responded to soaring
local prices with a 1.8-million tonne lift in annualised
production over the second half of 2020.
November saw annualised run-rates exceed 39.0 million tonnes
for the first time ever, according to the International
Aluminium Institute.
This supply surge is coinciding with a wind-down in demand
ahead of the Chinese Lunar New Year holiday period, with most
analysts expecting prices to weaken over the coming weeks and
months as the market digests the extra production.
This is how the aluminium market has played out for many
years. China's seemingly infinite ability to bring on new
capacity has been the single largest hindrance to any sustained
price rally.
Things, however, may be changing, with even Chinese
producers now talking about peak aluminium production.
CHINA'S CAPACITY CAP
China may be running out of new capacity to flex as national
production edges ever closer to the country's capacity cap of 45
million tonnes per year.
The government has since 2017 been enforcing a strict
old-for-new policy in the aluminium sector. New smelters have
only been permitted when matching older capacity is closed.
On paper there is six million tonnes of potential flex
between the cap and November's run-rate of 39 million tonnes. In
reality, the gap is much smaller than it appears.
There are currently around three million tonnes of shadow
capacity sitting idle, according to AZ China consultancy.
These smelters are deemed "illegal" by the Chinese
authorities, mostly because they failed to tick all the
bureaucratic boxes of the permissioning process.
"As best as we can tell, no operators have been tempted to
secretly energise their pots," AZ China said in a September note
to clients.
However, "it does act as a good reminder that the maximum
theoretical limit of 45 million tonnes cannot be reached based
on today's rules".
Specifically, the "illegal" smelters don't have the
replacement capacity licences they need to activate their
production lines.
Strip these operators out of the equation, and Chinese
aluminium production is much closer to the capacity ceiling than
it might at first seem.
CHINA'S POWER PROBLEMS
The Chinese government could of course allow the "illegal"
operators to start up. It could also lift the capacity cap.
Complicating the picture, however, is Xi Jinping's pledge in
October last year that China would reach peak carbon emissions
before 2030 and become carbon neutral by 2060.
That's a big problem for a sector that in 2018 was 90%
reliant on coal power to energise its potlines.
The tension between the requirements of the aluminium market
and the constraints of China's carbon ambitions are already
surfacing.
China's two biggest aluminium producers last week issued a
joint call for the sector to reduce emissions, conserve energy
and produce low-carbon metal as part of the national plan to
achieve carbon neutrality.
State champion Aluminum Corp of China and top private sector
producer China Hongqiao Group might seem unlikely
bedfellows, but both have large amounts of capacity powered by
hydro in Yunnan province.
Both are speaking from a position of "green" strength.
That however should not detract from the significance of
their joint call for strict capacity and output controls.
The real bombshell is a recommendation that production and
capacity of both primary aluminium and raw material alumina
should peak in the Five-Year Plan period running from 2021-25.
No targets were mentioned, but this unusual public-private
call to arms suggests the political landscape of China's
aluminium sector is shifting.
REST OF THE WORLD'S POWER PROBLEMS
If China is now close to its effective capacity cap, it
could be a window of opportunity for producers everywhere else.
Chinese exports of semi-manufactured aluminium products such
as foil and tube have hollowed out demand for primary aluminium
in other markets as well as keeping a tight lid on prices over
the last decade.
If the dynamic of excess Chinese production being exported
diminishes, it should be good news for everyone else.
However, many producers outside of China have their own
power problems.
While new capacity has been brought on stream in India, the
Gulf and Russia over the last couple of years, older smelters
are quietly giving up the ghost.
Alcoa last year curtailed its Intalco smelter in
Washington State and was due to close its San Ciprian plant in
Spain before pausing the process in December after a court
challenge.
The Tiwai Point smelter in New Zealand has just narrowly
escaped the axe, but owner Rio Tinto is still reviewing
the future viability of its ISAL smelter in Iceland.
The core issue in all these cases is less the price of
aluminium than the cost of power in local markets.
Aluminium smelters are power-hungry plants, and those in the
developed world are being squeezed out by rising demand for
electricity.
It's ironic that aluminium production is being hobbled by
the very sector that needs it most for decarbonisation, whether
it be directly in the form of solar panels or indirectly in the
lightweighting of electric vehicles.
This continued attrition of older smelter capacity also
poses a big question mark as to what the world will do if the
Chinese aluminium juggernaut does run out of road.
That seemed a remote possibility until a couple of years
ago. With the country's top two operators calling for national
production to peak over the next five years, it seems a lot less
remote today.
(Editing by Jan Harvey)