China’s aluminum exports
Previously, we noted that aluminum premiums have corrected sharply this year, partly due to rising Chinese exports. The new LME (London Metals Exchange) rules, which came into effect earlier this year, also seem to have played a part in dragging premiums lower. In this part, we’ll learn more about China’s aluminum exports.
China’s aluminum exports surge
The above graph shows the recent trend in China’s unwrought aluminum exports. Exports increased 35% year-over-year (or YoY) in June. Unwrought aluminum is a basic form of aluminum. China’s aluminum exports have been on an uptrend, increasing 35% YoY in the first six months of 2015.
Earlier this year, China relaxed its aluminum export norms and removed the 15% export duty on certain aluminum products. Higher Chinese aluminum exports are a negative for producers like Alcoa (AA), Vale (VALE), and Rio Tinto (RIO).
Can China’s aluminum exports be contained?
China (FXI) (MCHI) doesn’t have any natural advantage when it comes to aluminum production. The country lacks access to energy assets and has to import bauxite to produce primary aluminum. Aluminum production is energy-intensive and as a result, China has historically discouraged aluminum exports. Aluminum exports are akin to exporting energy, something China doesn’t have in abundance.
However, new smelting plants, like those that have come online in China, tend to be energy-efficient. Lower energy prices also reduce unit production costs for Chinese producers. A combination of excess smelting capacity and lower energy prices could keep China’s aluminum exports at elevated levels.
In the next part of this series, we’ll see how other aluminum plays are positioning themselves to brace for the onslaught of Chinese aluminum exports.