45% of This Key Chinese Sector Is Broke

There’s been a lot of concern lately about about Chinese mineral production. With observers fearing that growing domestic output of commodities like coal and zinc may lessen demand for imports.

It’s indeed true that China’s production of many commodities is rising. But recent data suggest that the overall effect may be much different than expected.

I’ve discussed how the majority of Chinese coal output is relatively high cost. With estimates suggesting that as much as 90% of the industry is losing money at current prices.

Reports this week from aluminum market pros at the Black China Blog paint a similar picture for the Chinese aluminum industry. Showing that commissioning of new metal production may not necessarily mean oversupply.

That’s because of the chart below, published this week by the service. Showing that 45% of Chinese aluminum smelters are losing money at current metals prices. That means all of the smelters at the right side of the graph, above the light grey line (which represents the aluminum price on the Shanghai Futures Exchange for Q4 2013–around 14,000 RMB per tonne).

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Even more striking is the fact that prices today are even lower than the average quarterly price shown here. Current Shanghai aluminum is going for 12,720 RMB/t–down over 9% from the level shown above.

Black China’s analysts point out that this situation is in fact likely to get worse. Because of recently-imposed power increases for aluminum producers. With the new pricing system aimed at hitting inefficient smelters particularly hard–charging higher rates for all producers who use over 13,700 kilowatts to make a tonne of aluminum.

Estimates are that these increased costs will affect 58% of China’s smelters. With Black China reporting that this is already causing a number of producers to shut down output, probably permanently.

This suggests the reality on the ground is quite different from popular perception. Yes, new aluminum capacity is being constructed across the country. But at the same time, a significant number of production units are closing.

The market is thus likely to end up a lot more balanced than most analysts believe. In fact, supply may see considerable cuts if low prices persist.

Given the structure of many Chinese industries, we could see a similar situation in other commodities.

Here’s to instructive lessons,

Dave Forest

dforest@piercepoints.com / @piercepoints / Facebook

 

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