Chinese aluminum exports
One of the major challenges facing the global aluminum industry has been the rise in Chinese aluminum exports. China’s aluminum exports rose 10% year-over-year in 2015. In November, there were reports that China was planning to curtail some of its aluminum capacity. According to a Bloomberg report, citing the Sino-Russian protocol on energy cooperation that was signed on November 16, China would bring “aluminum output into line with demand.” According to Bloomberg, quoting RUSAL’s Deputy CEO Oleg Mukhamedshin, this is “mega news for the industry.”
What about cuts?
China exported more than 430,000 metric tons of aluminum each of November and December. Additionally, Chinese aluminum exports had averaged ~350,000 metric tons between July and October.
China’s aluminum exports rose in the last couple of months as the data shows. This is in stark contrast to the country’s stated commitment to cutting excess industrial capacity.
Alcoa (AA) is banking on cuts in Chinese capacity as the company believes that 75% of China’s alumina refining and 70% of its aluminum smelting capacity are cash negative based on current metal prices.
However, China’s metal production has turned out to be lot stickier despite producers making losses. For quite some time now, there have been reports that Chinese steel mills are incurring losses at current steel prices. However, the country’s steel output only marginally fell in 2015 while its steel exports continued to surge. As China’s economy further cools off in 2016, we might not see many of the proposed capacity curtailments taking effect.
This could keep the Chinese aluminum exports at elevated levels in 2016 as well. Another interesting aspect related to aluminum’s supply has been the resilience of non-US based producers, including Rio Tinto (RIO) and Norsk Hydro (NHYDY). In the next part of this series, we’ll explore why non-US based smelters are not cutting capacity.
Investors looking at diversifying the risk of investing in a single security can also consider ETFs for their investment portfolios. The Materials Select Sector SPDR ETF (XLB) is an alternate way to play the materials space. Together, Alcoa and Ball Corporation (BLL) form 4.6% of the Materials Select Sector SPDR ETF (XLB). Overall, XLB has invested almost 9% of its holdings in metal producers.