The market and China’s role
Aluminum Association Annual Meeting
20th-21st October, 2015
Paul Williams
Head of Aluminium, CRU Analysis
Structure of presentation
1
Global demand outlook
2
China – growth and policy developments
3
China’s primary smelting sector
4
China’s downstream sector
5
Implications & conclusions
2
The aluminium market and China
• 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
Source : CRU
3
Semis consumption to see solid growth globally
8%+
N. America,
transport demand
boosts growth
Europe, weakness
in building and
construction and
Russia limit growth
CAGR 2014-2019%
1%
6 - 8%
4.3
%
2%
4 - 6%
China, remains the largest
growth in volume terms but
growth slows significantly
5%
5%
<0
%
2 - 4%
8%
8%
4%
1%
0 - 2%
< 0%
2014 = 76.6 million tonnes
2019 = 94.5 million tonnes
+5.9% CAGR growth
Source : Aluminium Market Outlook, September update, 2015
4
Structure of presentation
1
Global demand outlook
2
China – growth and policy developments
3
China’s primary smelting sector
4
China’s downstream sector
5
Implications & conclusions
5
China – A decade of misconceptions
• 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.
Primary Power costs have fallen on weaker thermal coal and power market reforms
• China has poor bauxite and high cost refineries, it will need to import growing
quantities of alumina
Alumina • WRONG. China built massive alumina capacity based on local and imported bauxite
• China has limited bauxite reserves of declining quality, imports must rise
Bauxite • 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
Source : CRU
6
China is suffering from a cyclical downturn whilst managing
structural change
End-use sector
inventory adjustment
is weighing on
metals demand
Divergence of growth rates
Year-to-date change, %
Rail freight tonnage
Real estate starts (floor area)
Real estate sales (floor area)
Car production (CAAM)
Car sales (CPCA)
Thermal power generation
Power consumption
Inbound tourist revenues*
Air passenger numbers
Renewables & nuclear power gen
Govt. health and education spend.*
Insurance premia*
Postal revenues*
Online retail sales*
Movie box office*
Note: * deflated with CPI
Data: CEIC, CPCA, CRU
-20 -10
High profile
indicators
Low profile
indicators
0
10
20
30
40
50
Source : CRU
7
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
Source : CRU
8
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%
Al Alloys
Primary Al
Export VAT
rebate of 5%
removed
Export duty
increased from
5% to 15%
1st
Jul
2006
1st
Nov
2006
1st
Jan
2004
1st Jan
2005
Primary Al
Removed 8%
export VAT rebate
and imposed 5%
export duty
Bars, Rods and
Profiles
15% export duty
imposed
Plate, Sheet,
Strip (Alloyed
and unalloyed)
Al Alloys & rod
and bar
Export duty
removed
Export VAT
increased to 13%
1st
Aug
2008
1st
Dec
2008
1st
May
2015
1st Jul
2007
20th Aug
2008
1st Jun
2009
Extrusions,
Castings and
FRPs
Extrusions and
castings
Al Alloys
Foil
Export VAT
reduced from 13%
to 8% or 11%
Export VAT
rebate removed
(11% and 8%)
15% export duty
imposed
Export VAT
rebate increased
to 15%
15th Sep
2006
Source : CRU
9
Structure of presentation
1
Global demand outlook
2
China – growth and policy
developments
3
China’s primary smelting
sector
Xinjiang
4
China’s downstream sector
5
Implications & conclusions
Inner Mongolia
Shandong
Regions of low cost greenfield
capacity growth
10
China production still increasing due to a small group of
large scale (low cost) expansions
China production marches on
8 projects dominate Chinese production growth
34000
Production '000t
China
World ex. China
2015
2019
Jinlian
32000
Projects in
Xinjiang, Inner
Mongolia and
Shandong drive
growth
Jiarun
Easthope
30000
2016
Tianshan
28000
Xinjiang Xinfa
Xinjiang Shenhuo
26000
Xinjiang Qiya
24000
Jan-14
Hongqiao/Weiqiao
Jul-14
Jan-15
Jul-15
0
2000
4000
6000
8000
10000
Source : Aluminium Market Outlook, September update, 2015
11
China Cash Costs show swathe of capacity losing money –
another 4.1 Mtpy of capacity expected to shut 2015-2017
2500
Cash Cost ($/t)
2000
• Blue shading – indicates new
low cost smelters in Xinjiang
1500
1000
SHFE Cash: $1,820/t
(11,500 yuan/t)
500
0
0
2000
4000
6000
8000 10000 12000 14000 16000 18000 20000 22000 24000 26000 28000 30000
Cumulative production (‘000 tonnes)
• 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
Source : Aluminium Costs, 2015
12
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
100
$/MWh
90
80
70
60
50
40
30
20
10
0
0
2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 24000 26000 28000
Cumulative Production (‘000 tonnes)
Source : Aluminium Costs, 2015
13
Aluminium fundamentals continue to soften in China –
and stocks will rise further in 2016, even with closures
‘000t
‘000t
35000
7000
30000
6000
25000
5000
20000
4000
15000
3000
10000
2000
5000
1000
0
0
2012
2013
2014
Production
2015
2016
2012
Consumption
2013
2014
2015
2016
Total stocks
Stocks include reported inventory at SHFE warehouses, state
stockpiles and unreported stock
Source : Aluminium Market Outlook, September update, 2015
14
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
1000
net exports 000s tonnes
800
600
400
200
0
-200
-400
-600
2010
2011
2012
Primary in extrusion form
2013
2014
Primary in CC re-roll form
2015
Ingot
2016
Billet
Source : Aluminium Market Outlook, September update, 2015
15
Structure of presentation
1
Global demand outlook
2
China – growth and policy developments
3
China’s primary smelting sector
4
China’s downstream sector
5
Implications & conclusions
16
Top 15 Chinese aluminium rolling mills
Henan and Shandong are the largest producing regions
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
4. Chinalco SWA, 400k
5. Chinalco Ruimin, 400k
6. Asia Aluminum, 400k
8. Zhenjiang Dingsheng, 350k
11. NELA, 270k
12. Alcoa Bohai, 220k
Source : Aluminium Rolled Products Market Outlook, August 2015
17
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
Alcoa Bohai
Tianjin
Zhongwang
Nanshan
Weiqiao
Zhongfu
Southwest Al.
Chinalco Ruimin
Existing capacity
Asia Al.
Planned capacity
Capacity currently
shuttered
Source : Aluminium Can Stock and Auto Body Sheet Market Outlook, 2015
18
Exports of aluminium from China in various forms
9000
China’s net export position, ('000t)
8000
7000
6000
5000
4000
3000
2000
1000
0
Rolled products
Extrusion and other
Fabricated products
Foil
Other selected final goods
Other selected final goods includes wheels, air conditioners etc.
Source : Aluminium Market Outlook, September update, 2015
19
Structure of presentation
1
Global demand outlook
2
China – growth and policy developments
3
China’s primary smelting sector
4
China’s downstream sector
5
Implications & conclusions
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
Source : CRU
21
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
Source : CRU
22
Game changers – what could see flow of Chinese exports
stop?
Probability: low-medium risk,
but increasing
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
infor
primary
Probability:
low..
now
output
More trade restrictions – more anti-dumping suits – particularly on fake semis and on
specific semis
Probability: increasing
Source : CRU
23
For more information
about CRU products and
services…
Contact Kathy Wright
[email protected]
Or visit www.crugroup.com