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Why China Remains the Wild Card for Aluminum Markets in 2016

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Nov. 20 2020, Updated 1:23 p.m. ET

Aluminum markets

Previously in this series, we discussed how there are huge variations in aluminum market projections for 2016. However, there is a broad-based consensus that global markets outside of China will see aluminum deficits in 2016. Therefore, whether global markets will record a surplus or deficit in 2016 will depend on the Chinese aluminum production.

Alcoa (AA) is banking on cuts in Chinese capacity because the company believes 75% of China’s alumina refining and 70% of aluminum smelting capacity are cash negative, based on current metal prices.

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Production cuts

According to the data released by the International Aluminum Institute, China (FXI) produced 2.53 million metric tons of aluminum in December 2015—a YoY (year-over-year) increase of less than 1%. This is the slowest YoY growth in Chinese aluminum production in the last five years. Prior to this, Chinese aluminum production rose in double digits YoY during each month of 2015.

Having said that, one month of production slowdown does not say much about China’s stated commitment to cut excess smelting capacity. But we’ll need to watch Chinese aluminum production over the coming few months to see if the country is indeed cutting its production.

Will cuts be sustainable?

On previous occasions, local governments in China have bailed out struggling aluminum smelters. Last year, China’s Chalco (ACH) had announced production cuts of 530,000 tons in October. However, according to a Wall Street Journal report, citing Nomura, Chalco cut production by only 150,000 tons as the local government decided to subsidize the smelter’s power supply. More Chinese smelters could receive state subsidies in a bid to prevent job losses.

However, if China cuts its aluminum production this year, as Alcoa is expecting, aluminum companies could see a turnaround in their fortunes. Other primary producers like Century Aluminum (CENX) and Norsk Hydro (NHYDY) would also benefit if Chinese aluminum exports come down significantly.

In any case, the key event Alcoa investors should watch this year is the company’s impending split. You can find out more about Alcoa’s split in our series Will Alcoa’s Splitting into 2 Companies Add Shareholder Value? For ongoing analysis, keep checking in with Market Realist’s Basic Materials page.

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