Beijing acts to stockpile aluminium

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Beijing’s powerful stockpiling agency is to buy 300,000 tonnes of aluminium in the coming weeks, in one of the most significant attempts to support the struggling Chinese metals industry since the 2008-09 crisis.

As well as being the largest consumer of industrial metals, China is the top producer of many, including aluminium, for which it accounts for 40 per cent of global output. But its smelters, which suffer from some of the highest production costs in the world, have been struggling with weak demand, high inventories and industry overcapacity.

Benchmark global aluminium prices on the London Metal Exchange have dropped 4.1 per cent since the start of the year, once again sliding below $2,000 a tonne – compared with the $2,300-$2,500 a tonne needed by higher cost smelters to break even, according to analyst estimates.

China’s State Reserves Bureau, one of the most powerful movers in global metals markets, will buy up to 300,000 tonnes of aluminium for delivery between April 1 and May 31, according to two traders with knowledge of the tenders. The purchases are part of a buying programme launched by the SRB last November, when prices were last below $2,000 a tonne.

Analysts believe the move is unlikely to cause a sustainable move higher in aluminium prices. Nonetheless, it could help to keep struggling Chinese smelters afloat, prolonging the oversupply that has hobbled the global aluminium industry.

Low aluminium prices have weighed on the profitability of some of the world’s largest miners, triggering hefty writedowns at Rio Tinto, BHP Billiton and Glencore in the most recent set of annual results. Rusal, the world’s largest aluminium producer, last week reported that it had swung to a $55m loss in 2012.

News of the SRB purchases has spurred a rally in Chinese aluminium prices, with benchmark three-month futures on the Shanghai Futures Exchange gaining 1.9 per cent last week, when rumours of the tenders first started to circulate among Chinese traders.

In early 2009, the SRB’s strategic stockpiling helped put a floor under prices of base metals, particularly copper, setting the stage for a surge higher over the next two years. However, the current round of purchases appears to be designed to support China’s domestic metals industry rather than to build strategic stocks.

“The SRB purchases can be taken as a strong signal that Chinese producers are struggling at current prices,” said Ryan Belshaw, metals analyst at Macquarie, estimating that 35 per cent of Chinese aluminium smelters and 15 per cent of those outside China were losing money at current prices.

However, analysts and traders were sceptical about whether the purchases would have a significant effect on the aluminium market.

“It changes nothing,” said Paul Adkins, managing director of AZ China, a consultancy specialising in the country’s aluminium sector. “The market is seriously over-supplied and awash with inventory.”