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Why Aluminum Production Costs Could Rise in China

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Aluminum production costs in China

Previously, we noted that the recent fall in the yuan would make Chinese (FXI) (MCHI) exports more competitive in the international markets. The move acted as a blow for steel and aluminum companies. The global steel and aluminum industries are already reeling under the impact of rising Chinese exports.

However, a weaker yuan could also lead to higher unit production costs for Chinese aluminum producers.

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China is not self-sufficient in raw materials

China 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. A weaker yuan would likely increase the unit production costs for Chinese aluminum companies, as they would have to shell out more for imported bauxite and coal.

However, their revenues would also increase on the back of a depreciating yuan. The net impact of a weaker yuan would still be positive for Chinese aluminum companies.

China’s aluminum surplus

China’s aluminum surplus has widened over the last few quarters, according to data compiled by the World Bureau of Metal Statistics, as seen in the chart above. You can define a surplus as production in excess of demand. The surplus in China has been finding its way into international markets, distorting global demand-supply balance.

Higher Chinese aluminum exports have nullified the supply balance that other aluminum producers including Alcoa (AA), Century Aluminum (CENX), and Rio Tinto (RIO) have been trying to achieve by cutting down on smelting capacity.

Meanwhile, how much aluminum did China export in July? We’ll explore this in the next part of the series.

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