China is the world’s largest consumer of aluminum. However, China isn’t a big player in the global aluminum trade. China has a limited impact on the global aluminum industry. On a net basis, China imported only 7,000 tonnes of unrefined aluminum in 2012.
One of the main reasons for China’s status in the aluminum market is the higher cost of producing electricity there. This increases the unit production costs for Chinese producers. A hefty duty of 15% levied by the Chinese government on primary aluminum exports is another competitive disadvantage for Chinese producers.
Chinese exports increase
The chart above shows the export of unwrought aluminum from China. Unwrought aluminum is the most basic form of aluminum. In the first ten months of 2014, aluminum exports from China were up 10% year-over-year.
China is adding to its aluminum smelting capacity. On the other hand, major aluminum producers including Rio Tinto (RIO), BHP Billiton (BHP), and Alcoa (AA) have shut down capacity. These companies form the investment universe of the SPDR S&P Metals and Mining ETF (XME). Century Aluminum (CENX) is a top holding of the XME.
According to estimates, China will likely add 7% to its aluminum smelting capacity in 2015. A lot of this new capacity will use captive power plants, giving smelters access to cheap electricity.
Higher exports in 2015?
China’s slowdown, along with the increase in its smelting capacity, raises fears of an increase in aluminum exports from China. But aluminum prices have to remain at higher levels before China will export it. And aluminum prices dropped to a six-month low recently.
The lower price of aluminum is a major challenge for plays in 2015, as we’ll discover in our next part.