Analysis: SHFE Aluminum Prices at Record Lows, as China Cuts Alumina Imports

Illustrating the dire state of the Chinese aluminum market, a recent Reuters article reports that China’s aluminum producers are postponing taking shipments and cutting spot imports of alumina, even though the country has recently been deprived its supply source for bauxite (the largest, by far).

Working back from the primary market, China is in surplus with stocks on the SHFE at 351,047 tons last week, the highest since August 2013. SHFE aluminum prices are consequently depressed, falling to their lowest level on record since contracts began trading in 2005 and have lost 8% this year alone, Reuters reports.

Smelters have cut alumina purchases since mid-February, with imports falling to 464,820 metric tons in February from 641,987 metric tons in January, according to customs data. Contracted shipments have been delayed or cancelled as smelters have been squeezed by a number of factors.

Weak prices are obviously one factor, but banks have significantly cut credit to smelters and letters of credit have become harder to obtain as banks worry about smelters’ economics, particularly debt levels, and Beijing tightens the screws on commodity lending across the board.

In addition, the falling yuan, currently at a 13-month low against the dollar, has made dollar-denominated imports sharply more expensive even as worries mount about China’s industrial health.

Activity in China’s factories shrank for a fifth straight month in March as output and new orders both weakened, while the flash Markit/HSBC Purchasing Managers’ Index (PMI) fell to an eight-month low of 48.1 in March from February’s final reading of 48.5. The preliminary March index showed new orders slid for a fourth consecutive month, to 46.9 – its lowest point since July 2013, while output fell to 47.3, the lowest since September 2012.

As if to underline the weakness of the aluminum sector, China is cutting back alumina imports even though it is simultaneously facing a supply squeeze for the raw material bauxite.

China imported just 3.8 million metric tons of alumina in 2013, a decline of 24% year-on-year; as its self sufficiency levels improved, the country has never imported more than 7.1m tons in any one year, according to Reuters. By comparison, it produced 47m tons of alumina in 2013, of which an estimated 16m tons was produced using imported bauxite, mostly imported from Indonesia.

Back to the Ban

Indonesia, of course, has been in the grips of a raw ore export ban of late, essentially cutting off China’s largest supply source.

Indonesia exported almost 49 million tons of bauxite in 2013, virtually all of which was destined for China. Indonesia accounted for 68% of China’s total bauxite imports in 2013. China’s only other major supplier is Australia at 20% and India at just 8%. So for China to cut alumina imports while in the grips of supply issue with bauxite shows just how dire the raw material supply market is in China.

True, the country has built up substantial stocks of bauxite, but they are being worked through this year and estimates vary as to how long they will last, probably only about six months.

What This Means for Metal Buyers

In the short term, Western alumina refiners will have to adjust production if they are to maintain market prices, but in the medium term, Indonesia’s ban holds promise for higher alumina prices as China comes back into the market.

Even a depressed Chinese aluminum market will require in the region of 40 million tons of alumina, and with domestic bauxite only able to supply a part of that, imports will be required to meet the rest.

Essentially, we have a case of short-term pain and long-term gain for Western alumina producers.