Global Overcapacity China Aluminum Industry Where to Go

Recently, Rio Tinto, the global mining giant, acknowledged the dim prospect of the aluminum industry and reduced the book value of its related departments by US$9 billion. Rio Alberto’s chief executive, Abe, warned that profits in the medium term may continue to be squeezed.

Global capacity overcapacity China Aluminum is in a dilemma Rio Tinto's rival, BHP Billiton, is even more pessimistic about the prospects of the aluminum industry, saying that the company has stopped investing in aluminum and has had to reconsider the future of this business. BHP Billiton’s chief executive Gao Ruisi said: “If there is any business that is no longer needed, and it is unreasonable to hang it on the balance sheet, we need to reconsider the development prospects of the aluminum business. At present, the business is obviously not a problem, but We need to note that the weakening of aluminum business profitability is caused by structural factors rather than cyclical phenomena."

The outlook is bleak due to the imbalance between supply and demand. From 2002 to 2006, international aluminum prices have been rising. The average spot price of the London Metal Exchange (LME) is 1,350 US dollars, 1,431 US dollars, 1,716 US dollars, 1,898 US dollars, and 2,569 US dollars per ton, respectively. Driven by price increase and capacity growth, the total profits of the aluminum smelting industry during the period from 2004 to 2007 were 10.6 billion yuan, 11.9 billion yuan, 28.1 billion yuan, and 36.9 billion yuan, respectively.

Under the lure of high profits, many countries including China have launched electrolytic aluminum projects. Since 2006, the investment in China's electrolytic aluminum projects has shown an upward trend year by year. By the end of 2010, the national electrolytic aluminum production capacity had reached 23 million tons, but the actual output was 15.6 million tons, and the utilization rate of equipment was only 70%.

At the same time as there was a surplus of production capacity, the aluminum industry was brutally hit by shrinking demand. China Investment Advisor Metallurgical Industry Researcher Wei Qining pointed out that the current global economic situation is weak, the European debt crisis is serious, and uncertain factors are still prominent in the short term. Due to concerns about global economic conditions and industry demand, a large number of metal prices have fallen directly, macro and micro environment. The combination has created a downturn in the global market.

In January 2012, foreign analysts estimated that the market's excess supply will reach 600,000 tons this year, and the market's excess supply in 2013 will also reach 415 thousand tons. “The price of aluminum will not rebound significantly in 2012,” said Li Chunling, a nonferrous metal analyst at the China Business Productivity Promotion Center.

In the market environment where supply and demand are imbalanced, the profits of the aluminum industry began to drop sharply. Analysts estimate that 30% to 40% of the world's products are produced at a loss. In the past five years, the supply of the market has become oversupply, while the price of raw materials has been rising, especially the price of electricity. This has led to a certain degree of squeeze on the profits of aluminum plants. As a result, companies including Rio Tinto and Alcoa have all cut their production capacity in order to balance the market.

Where will China Aluminum go? With the global trend of compressed aluminum production, what will China Aluminum, which accounts for 40% of the world's output, go from here?

Li Chunling said that the motivation of Chinese companies for cutting capacity is not great. According to the production characteristics of aluminum, the reduction in production will make the company more lossy. Therefore, as long as there are meager profits, companies will continue to produce and there will be no incentive to cut production. The massive closure of aluminum plants is certainly not realistic in the current China.

Wei Qining pointed out that the reduction of production by Rio Tinto and BHP Billiton is a big plus for China's aluminum industry. First, the reduction in output of several major manufacturers may have a certain stimulating effect on aluminum prices, which in turn will help boost the domestic aluminum market. Second, it may stimulate China's accelerated self-sufficiency.

From the "12th Five-Year Plan" non-ferrous metal industry development plan, China's aluminum industry is unlikely to reduce production. The plan proposes that during the “Twelfth Five-Year Plan” period, the development will be dominated by control, the non-ferrous metal industry's added value (comparable price) will increase by an average of 10% annually, and the average annual growth of the output of 10 non-ferrous metals will be controlled at around 8%.

It must be prevented that the global market downturn will bring risks to the development of China's aluminum industry. The pace of development of China's aluminum industry should be appropriately slowed down and even recycled. Li Chunling said that in 2012, China's aluminum industry may have the possibility of passive production cuts. Enterprises should be psychologically prepared and take this opportunity to upgrade the industry, eliminate backward production capacity, and enhance product competitiveness.