China’s Pollution Crackdown Gives Aluminum a Bump

Apr 25, 2017

A worker drives a forklift to transport aluminum bars at a factory in Anshun, China, in July 2013. (CHINA STRINGER NETWORK)

NETRALNEWS.COM - Pollution is helping the price of aluminum to thrive.The metal has defied the recent selloff in copper, lead and other industrial metals, in anticipation of a Chinese clampdown on pollution that is expected to lead to the closure of some aluminum smelters later this year.

Most industrial metals have been hit by concerns that Chinese demand is waning and the fade in the global reflation trade—the rally pinned to expectations of higher growth and inflation since the election of President Donald Trump.

But aluminum has risen 3.6% in the past three months, and is up almost 15% in London in the year to date. That is against a fall of 7.2% in the year so far for nickel and a gain of 2.5% for copper.

In late February, China issued anti-air-pollution directives aimed at tackling smog created by coal burning that some analysts say could later this year cut as much as 30% of aluminum production from a country that produces roughly half of the world’s stock.

Most global aluminum producers use a mix of electricity sources, but China’s energy-intensive smelters received 90% of theirs from coal, according to the International Aluminium Institute, an industry body.

Smelters in China’s Henan, Shandong and Shanxi provinces are due to close during winter, in a move that would remove 6% of global capacity in those months, according to ETF Securities.

“That could be enough to tip the global balance of aluminum into a deficit,” said Nitesh Shah, a commodities strategist at the firm.

Though similar government directives have been broadly ignored by provincial authorities in the past, there are signs that Beijing is taking a tougher stance this time, said Caroline Bain, an economist at Capital Economics.

Since those February directives, the Chinese government has halted construction at three refineries in Xinjiang province, she said. Shares in aluminum producers have risen with the metal. The stock of China’s Aluminum Corp. has increased by 23% year to date, while Russia’s United Co. Rusal has gained 17% and U.S. firm Alcoa Corp. is up 13%.

But some analysts question how long the price bump will last. With the smelting ban only hitting facilities close to major cities, those in unaffected areas may capitalize on higher aluminum prices by increasing production.

The short-term direction of aluminum prices depends on whether other regions can raise production at a rate that outpaces the cuts in China, said Xiao Fu, head of commodities research at BOCI Global Commodities.

“Aluminum is usually a range-bound metal, but producers have improved profitability in recent months and these higher prices are likely to incentivize them to try to capture further profit,” Ms. Fu added.

 Source: Netral English