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The market and China’s role
Aluminum Association Annual Meeting
20th-21st October, 2015
Paul Williams
Head of Aluminium, CRU Analysis
Structure of presentation
China’s downstream sector
3
4
5
1 Global demand outlook
2 China – growth and policy developments
Implications & conclusions
China’s primary smelting sector
2
• The good…
oGlobal demand remains
positive, especially in
transport
• …the bad…
oChinese demand growth
slowing, BRICs disappoint
• …and the downright ugly
oChina overcapacity in
upstream and downstream
The aluminium market and China
3
Source : CRU
Semis consumption to see solid growth globally
4.3
%
1%
8%
2%
1%
<0
%
CAGR 2014-2019% 8%+
6 - 8%
4 - 6%
2 - 4%
0 - 2%
< 0%
2014 = 76.6 million tonnes
2019 = 94.5 million tonnes
+5.9% CAGR growth
5% 5%
8% 4%
N. America,
transport demand
boosts growth
Europe, weakness
in building and
construction and
Russia limit growth
China, remains the largest
growth in volume terms but
growth slows significantly
4
Source : Aluminium Market Outlook, September update, 2015
Structure of presentation
China’s downstream sector
3
4
5
1 Global demand outlook
2 China – growth and policy developments
Implications & conclusions
China’s primary smelting sector
5
Primary
• China has high cost power – it will become a big importer of primary
• WRONG. China has built a surplus of primary capacity and continues to invest. Power costs have fallen on weaker thermal coal and power market reforms
Alumina
• China has poor bauxite and high cost refineries, it will need to import growing quantities of alumina
• WRONG. China built massive alumina capacity based on local and imported bauxite
Bauxite
• China has limited bauxite reserves of declining quality, imports must rise
• RIGHT (We expect)
Semis
• China will only export low value products
• WRONG IN LONG TERM. China is fast improving quality and will penetrate higher value markets such as can stock
China – A decade of misconceptions
6
Source : CRU
China is suffering from a cyclical downturn whilst managing
structural change
-20 -10 0 10 20 30 40 50
Movie box office*
Online retail sales*
Postal revenues*
Insurance premia*
Govt. health and education spend.*
Renewables & nuclear power gen
Air passenger numbers
Inbound tourist revenues*
Power consumption
Thermal power generation
Car sales (CPCA)
Car production (CAAM)
Real estate sales (floor area)
Real estate starts (floor area)
Rail freight tonnage
Divergence of growth rates
Year-to-date change, %
Note: * deflated with CPIData: CEIC, CPCA, CRU
High profile
indicators
Low profile
indicators
End-use sector
inventory adjustment
is weighing on
metals demand
7
Source : CRU
Chinese government policy has made “Value-added
products” the main focus The Chinese government wants to deter exports of ‘pure energy’ in the form of primary aluminium
but is it going to enforce it?
Domestic
expansion
Overseas
Projects
Import Export
Mining
Refining
Smelting
Rolling and
Extruding
Recycling
?
Looking to halt new
capacity but with
little success
8
Source : CRU
VAT rebates favour downstream products – but recent tax
changes on alloyed primary suggest new direction Primary Al
Export VAT rebate
decreased from 15% to 8%
Primary Al
Removed 8%
export VAT rebate and imposed 5%
export duty
Al Alloys
Export VAT rebate of 5%
removed
Extrusions, Castings and
FRPs
Export VAT reduced from 13%
to 8% or 11%
Primary Al
Export duty increased from
5% to 15%
Extrusions and castings
Export VAT rebate removed (11% and 8%)
Bars, Rods and Profiles
15% export duty imposed
Al Alloys
15% export duty imposed
Plate, Sheet, Strip (Alloyed
and unalloyed)
Export VAT increased to 13%
Foil
Export VAT rebate increased
to 15%
1st Jan
2005
1st Jul
2007 15th Sep
2006
20th Aug
2008
1st
Dec
2008
1st Jun
2009
1st
May
2015
1st
Aug
2008
1st
Nov
2006
1st
Jul
2006
1st
Jan
2004
Al Alloys & rod and bar
Export duty removed
9
Source : CRU
Structure of presentation
China’s downstream sector
3
4
5
1 Global demand outlook
2 China – growth and policy
developments
Implications & conclusions
China’s primary smelting
sector
10
Xinjiang
Inner Mongolia
Shandong
Regions of low cost greenfield
capacity growth
China production still increasing due to a small group of
large scale (low cost) expansions
0 2000 4000 6000 8000 10000
Hongqiao/Weiqiao
Xinjiang Qiya
Xinjiang Shenhuo
Xinjiang Xinfa
Tianshan
Easthope
Jiarun
Jinlian
2015 2016 2019Production '000t
8 projects dominate Chinese production growth
24000
26000
28000
30000
32000
34000
Jan-14 Jul-14 Jan-15 Jul-15
China World ex. China
China production marches on
Projects in
Xinjiang, Inner
Mongolia and
Shandong drive
growth
11
Source : Aluminium Market Outlook, September update, 2015
0
500
1000
1500
2000
2500
0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 24000 26000 28000 30000
China Cash Costs show swathe of capacity losing money –
another 4.1 Mtpy of capacity expected to shut 2015-2017 Cash Cost ($/t)
Cumulative production (‘000 tonnes)
SHFE Cash: $1,820/t
(11,500 yuan/t)
• At SHFE cash price of $1820/t - RMB11,500/t – nearly 40% of capacity with costs above price
• Costs have fallen significantly through fall in coal prices, power market reforms, lowering power costs.
Also decline in raw material inputs such as alumina. These declines have not been enough to cover for
decline in price
• Companies are supported by provinces to remain open to provide employment and maintain provincial
GDP growth
• However, new capacity in Xinjiang, Inner Mongolia, Shandong with captive coal and power are low cost
and are located in the lower half of the cost curve. These producers are still expanding capacity
12
Source : Aluminium Costs, 2015
• Blue shading – indicates new
low cost smelters in Xinjiang
0
10
20
30
40
50
60
70
80
90
100
0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 24000 26000 28000Cumulative Production (‘000 tonnes)
$/MWh
Over 76% of Chinese production was wholly dependent on
coal-fired electricity in 2014 An additional 11% of Chinese production is partially dependent on coal-fired power making 87% of total
production dependent on coal
13
Source : Aluminium Costs, 2015
Aluminium fundamentals continue to soften in China –
and stocks will rise further in 2016, even with closures
‘000t
0
5000
10000
15000
20000
25000
30000
35000
2012 2013 2014 2015 2016
Production Consumption
0
1000
2000
3000
4000
5000
6000
7000
2012 2013 2014 2015 2016
Total stocks
‘000t
Stocks include reported inventory at SHFE warehouses, state
stockpiles and unreported stock
14
Source : Aluminium Market Outlook, September update, 2015
-600
-400
-200
0
200
400
600
800
1000
2010 2011 2012 2013 2014 2015 2016
Primary in extrusion form Primary in CC re-roll form Ingot Billet
net exports 000s tonnes
Primary metal will continue to come out of China in one
form or the other • Likelihood of billet
exports, especially if VAT
rebates are added to
7604 codes
15
Source : Aluminium Market Outlook, September update, 2015
Structure of presentation
China’s downstream sector
3
4
5
1 Global demand outlook
2 China – growth and policy developments
Implications & conclusions
China’s primary smelting sector
16
Top 15 Chinese aluminium rolling mills Henan and Shandong are the largest producing regions
8. Zhenjiang Dingsheng, 350k
1. Nanshan Aluminum, 700k
2. Shandong Weiqiao, 533k
3. Henan Mingtai, 450k
7. Luoyang Longding,350k
9. Gongyi Wanda, 300k
10. Henan Xintai, 300k
11. Luoyang Al, 200k
14. Luoyang Wanji, 200k
15. Henan Xichuan, 200k
5. Chinalco Ruimin, 400k
11. NELA, 270k
12. Alcoa Bohai, 220k
4. Chinalco SWA, 400k
6. Asia Aluminum, 400k
17
Source : Aluminium Rolled Products Market Outlook, August 2015
China will be a major can stock player Chinese total can stock capacity to exceed 1.9m tpy by 2019, from around 550,000 tpy in 2011
Weiqiao
Nanshan
Asia Al.
Existing capacity
Planned capacity
Alcoa Bohai
Zhongfu
Chinalco Ruimin
Southwest Al.
Tianjin
Zhongwang
Capacity currently
shuttered
Source : Aluminium Can Stock and Auto Body Sheet Market Outlook, 2015 18
Exports of aluminium from China in various forms
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
Rolled products Extrusion and other Fabricated products Foil Other selected final goods
China’s net export position, ('000t)
Other selected final goods includes wheels, air conditioners etc.
19
Source : Aluminium Market Outlook, September update, 2015
Structure of presentation
China’s downstream sector
3
4
5
1 Global demand outlook
2 China – growth and policy developments
Implications & conclusions
China’s primary smelting sector
20
Main points
Chinese demand is slowing but capacity is still rising – China is looking to export its growing surplus
We expect fake primary to continue to exit and more billet to emerge
Semis exports will grow, especially in rolled products
Still a risk of other tax changes to promote primary metal exports – the weaker the economy gets the greater the risk
21
Source : CRU
Game changers – what could see flow of Chinese exports
stop?
Escalating debt sees significantly higher closures and halt to new capacity
Environmental clampdown – on alumina red mud, CO2 emissions carbon trading schemes and burning of high sulphur cokes could see significant reduction in primary output
More trade restrictions – more anti-dumping suits – particularly on fake semis and on specific semis
22
Source : CRU
Game changers – what could see flow of Chinese exports
stop?
Escalating debt sees significantly higher closures and halt to new capacity
Environmental clampdown – on alumina red mud, CO2 emissions carbon trading schemes and burning of high sulphur cokes could see significant reduction in primary output
More trade restrictions – more anti-dumping suits – particularly on fake semis and on specific semis
Probability: low-medium risk,
but increasing
Probability: low.. for now
Probability: increasing
23
Source : CRU
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