China’s role in the aluminum market
A commodity market overview is incomplete without mentioning China. With a mammoth 1.4 billion population and a growing economy, China currently dictates the global commodity market. Both iron and steel industries are reeling under the impact of China’s slowdown.
Let’s analyze China’s impact on the aluminum market.
The Chinese growth story
China’s metals consumption took off in a big way at the turn of this century. Chinese demand has grown at a rate of 16% since 2000. The growth in global consumption over this period has been only 1%. The growth has predominantly been led by the infrastructure growth and the export of aluminum–containing products from China. Currently, China is the biggest consumer of aluminum, accounting for almost half of the global demand. These factors have ensured that China continues to dictate the aluminum market.
How the world failed to solve the Chinese puzzle
China imported a quarter of its aluminum demand in 2000. It lacked in raw material required for aluminum production. Aluminum production requires a lot of energy, and China does not have access to cheap energy sources.
These factors made aluminum producers expand their capacity to cater to the growing Chinese demand. The chart above shows the increase in smelting capacities globally. As you can see, the installed capacity took a big leap after 2000.
China was importing a large portion of its aluminum demand earlier. But since 2007, imports make up less than 2% of Chinese demand. This, along with a general slowdown in the economy, made aluminum companies sit on huge unused capacities. The aluminum companies failed to read the trend in Chinese capacity. So this has had a negative impact on aluminum markets.
Investors of Alcoa (AA), Century Aluminum (CENX), Kaiser Aluminum (KALU), Constellium (CSTM), and the SPDR S&P Metals and Mining ETF (XME) need to watch China’s consumption. We’ll discuss more about China in our next article.