MI ANALYSIS: Chinese aluminium/alumina production growth loses momentum

The latest official figures released by China’s National Bureau of Statistics (NBS) suggest that the country’s soaring production growth of both primary aluminium and of alumina lost some of its momentum in May.

It’s important to remember that the figures just released are preliminary and that the NBS frequently and sometimes significantly revises its figures. This may be particularly pertinent in May, since we have noted some anomalies across the base metals production data series—possibly related to the national holidays in the first week of the month. Some form of confirmation should come when the alternative data series from the China Nonferrous Metals Industry Association is released in a week’s time.

That said and taking yesterday’s figures at face value, May does seem to have brought a slowing in production growth rates.

Aluminium production at 955,400t was up by 28.6% year-on-year. That’s still a super-fast growth rate but the first time it has been below the 30% level so far this year.

Annualised production in May fell sharply from April’s peak of 11.852 million tonnes to 11.249 million tonnes and, as the chart, shows, there is a sense that annualised production is now topping out in a 11-12 million tonne range.

Analysts have been looking for this to happen some time around the middle of this year. The extraordinary growth rates recorded in Q1 2007 were fuelled by capacity restarts, largely on the back of much better domestic alumina supply and the resulting drop in alumina prices.

At the same time demand for primary metal has soared as the country switched from being a major exporter of primary metal to being a major exporter of aluminium product to leverage the gap in the tax treatment of the two categories of metal.

Both those factors should be time-limited. Those smelters which have not by now restarted are unlikely to do so, while there are a growing number of reports coming out of China that Beijing is poised to revise the export tax rebates on products that have caused the export surge. Throw in renewed efforts by the central authorities to force smaller, inefficient smelters out of business via environmental and power controls and the result should be a tailing-off of production growth over the second half of 2007.

Alumina

The May figures showed a comparable fall in China’s production of alumina. At 1,586,500t, it was 8% off the pace of April’s 1,724,900t, while year-on-year production growth was “only” 47.6%, down from 63.5% in both March and April.

In terms of annualised production the May fall is clearer to see—18.68 million tonnes versus April’s 20.99 million tonnes.

In the case of alumina, we are more concerned we may be seeing a statistical blip and June’s figures will now be critical in determining whether this is the case of whether a change of trend is taking place.

Although there has been talk among China’s independent alumina producers of concerted production cuts to support falling domestic prices, such loose-knit alliances have in the past failed to translate their words into actions for any sustained period of time.

Nor are we convinced there are not more new projects and capacity expansions still to be ramped up over the coming months. As such, we view the apparent May decrease in production with a degree of caution.