China’s aluminum output has been running flat out during the first quarter despite the coronavirus sweeping the country, Reuters reported today.
China’s aluminum production rose by 2.4% year over year in the first two months of 2020, Reuters advised, as smelting capacity commissioned late last year took supply higher, with output averaging 97,500 metric tons a day over January and February combined.
However, that average was down from around 98,000 tons a day in December, but it was still the third-highest daily rate on record.
Downstream consumers in the form of semi-finished aluminum product producers have been slow to restart, Reuters notes, after the extended holiday as virus-related travel curbs left them short of workers. Since smelters cannot shut down and restart in a matter of weeks, they have largely maintained operating rates, despite weak downstream demand.
Not surprisingly, exchange inventories on the SHFE have mushroomed, more than doubling this year to over 500,000 metric tons. Reuters notes there could be another 300,000 tons sitting at smelters waiting to be delivered as stock levels continue to build.
Aluminum prices in China are at the lowest since 2016 and many mills are believed to be in deficit.
But whether that will lead to smelter closures in the short term remains to be seen.
For the time being, expect SHFE inventory to continue to climb as mills seek a home for excess metal. There will doubtless continue to be talk about smelter profitability and possibly idling of some smelter capacity, but that this isn’t necessarily bullish for aluminum prices, there will be no shortage of primary metal (not in the short term, anyway). Both mills and exchanges have plenty of metal and downstream product producers are still struggling.
Just because China is “back at work,” we should not assume primary consumption, product production and product consumption will rapidly ramp up to Q4 2019 levels.
Workers are not uniformly back to work, as attendance varies. If a factory has multiple production stages and stage 1 has 80% attendance while stage 2 has 20% attendance, the whole factory only runs at 20%. As anyone who has studied manufacturing processes knows, an operation runs at the speed of its weakest link.
Talk of 80% attendance levels can be misleading. China is recovering, but it is not bouncing back. This is happening against a backdrop of a downturn in export markets due to the spread of the virus in the U.S., Europe, Japan and nearby southeast Asia, which will continue to be a major headwind to the Chinese economy (and, hence, aluminum demand) for months to come.
Such a scene suggests the prospects for a rise in prices appears bleak and smelters would do well to review their output. China’s smelter market is intensively competitive and it will be hoped by many in the private sector that state producers may be forced to idle some capacity early for the good of the market.
Until that happens or there is an unexpected rise in demand, we have to assume aluminum prices are going to continue to face severe headwinds into Q2.