China Hongqiao Group’s (HKG:1378) announcement this week that it plans to shut down over 2 million tonnes of outdated smelter capacity could bode well for the aluminum price going forward but Commerzbank predicts the rally will not last.
For instance, during the announcement, the world’s largest aluminum firm did not offer a timeframe for when the closures would happen. Chinese aluminum producers are under pressure from the government, which is forcing the suspension of aluminum that do not have permits to build and expand or that do not meet environmental regulations. Beijing has also ordered producers in 28 cities to curb output over the winter to reduce pollution. China’s plans to curb production have boosted shares of Yunnan Aluminum (SHE:000807) by 55 percent and state-run Aluminum Corp of China (SHA:601600) by 47 percent since the start of July.
Aluminum has rallied about 14 percent in 2017 and was trading at $1,926 per ton as of 2pm on August 3, up from $1,907 on August 2. However, according to a report by Commerzbank Commodity Research, the aluminum price is expected to fall below $1,800 per ton in Q4, 2017. Commerzbank explained that so far any closures in China have been offset with new production facilities. China accounts for about 60 percent of global aluminum production and its production reached a record of 2.95 million tons in January, according to data from the International Aluminum Institute.
Global production increasing
Global aluminum production for the first half of 2017 was up 6 percent year-on-year and Commerzbank predicts it is likely to hit a record high; exceeding the 60 million ton mark for the first time. Notably, production is expected to pick up as the Portland smelter recovers from a power outage that resulted in low output for a few months, adding 220,000 tons more aluminum each year. Portland received a bailout from the Australian government in January under conditions that it would continue operating until at least 2021.
Last month, US producer Alcoa (NYSE:AA) announced a partial restart to its Warrick smelter, which is expected to be up and running in Q2, 2018. The plant is believed to be capable of producing 160,000 tons of aluminum per year. One of the largest aluminum producers in the Middle East, Aluminum Bahrain, intends to expand annual production by 50 percent to about 1.5 million tons. Russia’s Rusal plans to complete its Taishet smelter by 2020 after years of delays. Taishet would have a production capacity of 430,000 tons per year.
Don’t forget to follow us @INN_Resource for real-time news updates!
Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.