China cuts impact global aluminium output in Oct

LONDON, Nov 25 (Reuters) - Global primary aluminium production fell at an annualised rate of almost 1 million tonnes in October, according to figures from the International Aluminium Institute (IAI). This is the first tangible evidence to back up the lengthening list of cutbacks announced by aluminium producers in response to the collapse in prices to three-year lows. However, this is not a one-dimensional dynamic. October's drop resulted solely from a decline in Chinese production. In the rest of the world, falling production in some regions is still being offset by rises elsewhere. The regional divergence in production trends underlines the extent to which overall the supply-side response, although steadily building momentum, is still lagging the super-fast deterioration in demand. CHINA CUTS Global production dropped to an average 106,230 tonnes per day in October from 108,870 tonnes in September. In annualised terms, the month-on-month slide was equivalent to about 964,000 tonnes. Chinese production figures, supplied by the China Nonferrous Metals Industry Association (CNMIA), showed national output falling at an annualised rate of 1.042 million tonnes in October. October output of 1.106 million tonnes was 2.6 percent lower than output in October 2007. This marks a break in the long-running supersonic production growth registered in China in recent years. National aluminium champion Chalco announced in October it was initiating a swinging 18-percent cut in capacity, representing 720,000 tonnes of annual output, in response to low prices and domestic market weakness, which has been manifesting itself in a massive inventory build. Stocks held by the Shanghai Futures Exchange have been oscillating around the 200,000 tonne level since the start of November. However, Reuters has reported a total stock overhang of 1 million tonnes, most of it sitting in non-exchange warehouses. A sign of desperation in the sector has come in the form of an official request via the CNMIA for the state to top up its strategic reserves of the light metal. There are several other confirmed cutbacks in China. Click on the following link for the breakdown. Since the Chinese smelter sector is still highly fragmented, there is probably more producer pain out there which hasn't yet made it onto the collective radar screen. Some offset to closing potlines may come from new smelter starts, which are still taking place, particularly projects that are vertically integrated with power supply. China, though, is currently the driver of the global supply-side response and it probably will remain so through the end of the year. NON-CHINA RESPONSE BUILDING Producers outside of China have also started cutting back production. U.S. producer Alcoa is leading the way. It has just announced another 350,000 tonnes of capacity cutback, following the mothballing of the 265,000-tonne-per-year Rockdale smelter in Texas, announced at the end of September. Much of the planned reduction will come from technical adjustments, such as "targeted suspension of pot re-lining, optimization of pot-operating parameters, and by modulating power use for sale during peaks in the power markets", Alcoa said. However, the programme also will include partial curtailments of capacity at Ferndale in the United States and Baie Comeau in Canada. North American primary aluminium peaked at 16,160 tonnes per day in May this year and has been sliding ever since, according to the IAI. In October, it reached 15,580 tonnes, which was the lowest monthly operating rate since August 2007. Regional output is going to keep falling as Alcoa's cuts make greater impact in November and December. Declining North American production, however, wasn't enough to stop total non-China aluminium production rising month-on-month to 70,500 tonnes per day in October. Indeed, it was the third consecutive monthly increase and the global operating rate was just shy of an all-time high of 70,600 tonnes per day seen in April and May. New plant ramp-ups are still pushing production higher in Western and Eastern Europe. Annual production growth in Western Europe has slowed but at 8.8 percent in the January-October period, it was still the fastest of any region in the world, even outpacing China's 8.5 percent. Alcoa is the key player here also. The company's 320,000-tonne per year Fjardaal plant in Iceland has been firing up to full capacity production this year. In addition, Western Europe has yet to see any significant production cutbacks. Vimetco and Norsk Hydro have announced curtailments at their respective Romanian and Norwegian smelters but they won't kick in until December at the earliest. The only confirmed reduction in output in Western Europe so far this year was at the Rio Tinto's majority-owned Anglesey smelter in the United Kingdom. However, that was due to a fire in June, which forced two of the plant's three lines to close. Full recovery is expected by the end of the month. However, Rio Tinto confirmed on Monday that it had idled around one-third of its 175,000-tonne-per-year Lynemouth smelter, also in the United Kingdom. But a company spokesman told Reuters the curtailment would be only a temporary measure to allow refurbishment work. STILL TOO LITTLE There are other producer cutbacks taking place around the world. More will certainly come. And they will need to. Although seasoned hands in aluminium have lauded the speed with which producers have reacted to the slump in prices, there is still a strong sense they are failing to catch up with the even faster deterioration in demand outlook. Macroeconomic signals are still in freefall. The flash estimate of the manufacturing purchasing managers index in the euro zone slumped to a record low of 36.2 in November, according to figures released on Friday. Visible stocks in London Metal Exchange warehouses are rising and are doing so fast. The headline figure surged by a net 114,675 tonnes to 1,726,325t last week. Some of this is undoubtedly the movement of off-market stocks onto exchange warrant as fresh financing deals fall foul of constipated wholesale credit markets. However whether held off-market or on-market, it is quite evident that the metal is surplus to requirement. A producer response has started in China. In the rest of the world that is still taking shape and gaining momentum. How fast it does this will determine how high surplus stocks will swell in the current phase of the cycle.