After years of excess supply the global aluminium market may be turning a corner, as China seeks to cut capacity and the incoming Donald Trump administration ratchets up trade threats against the world’s largest producer of the lightweight metal.
A glut of aluminium in recent years has decimated the US aluminium industry, where smelters were forced to shut down as Chinese imports rose. Now, after tackling excess capacity in coal and steel in 2016, there are signs Chinese authorities are turning their focus to aluminium, according to official and media reports.
At the same time, Wilbur Ross, Mr Trump’s nominee for Secretary of Commerce who bought up bankrupt steel industries in the early 2000s, told his Senate confirmation hearing this week that the US needs to focus on tariffs against Chinese steel and aluminium production.
“The aluminium market is at a tipping point,” said Eoin Dinsmore, an analyst at consultancy CRU in London. “If we are going to see barriers to exports and environment cuts in China we’ve got two really big events that are going to have a huge impact on the price.”
Speculation about China’s moves have already propelled the metal’s price to rise 8 per cent higher this year, its best January since 2012, to $1,818 a tonne on the London Metal Exchange. It could hit $2,000 a tonne if China implements cuts, according to analysts at Goldman Sachs.
Xu Shaoshi, director of the National Development and Reform Commission in China, said this month that efforts to cut capacity in steel and coal were only in the early stages of the campaign. “We will continue on this line, and deepen supply-side reform,” he said.
Last year government-enforced cuts led to rallies in the price of steel and coal, with coking coal becoming the best performing global commodity.
China produces around half of the world’s aluminium. Up to 30 per cent of aluminium capacity could be cut in Henan, Shandong and Shanxi, according to local media reports. That could represent 6 per cent of global capacity and push the market into a deficit of around 1.5 to 2.5m tonnes, Goldman Sachs analysts estimate.
“We see the aluminium market as becoming increasingly manageable,” they said. “Meaning market equilibrium could be achieved even without a sustained, low price.”
Still, unlike coal and steel, demand for aluminium is set to increase in important sectors such as the automotive industry, especially for electric cars. China’s aluminium producers are also moving up the value chain and say there is strong domestic demand for the metal. China’s Zhongwang is expanding a production line in Tianjin that it says will be the biggest in the world and is working with the country’s automaker Chery Automobile.
The rapid build-up of China’s domestic aluminium industry has already spurred retaliation by the US. The share of Chinese imports into the US has risen from about 5 to 6 per cent to 12 per cent last year, according to Mr Dinsmore.
Last week the US launched a case at the World Trade Organisation targeted at the Chinese aluminium industry. It alleges that loans and subsidised energy in China enabled companies to sell primary aluminium at artificially low prices.