Advantage for Alcoa: Chinese Aluminum Production Continues to Fall

Chinese aluminum production

China’s aluminum exports rose by 10% YoY (year-over-year) in 2015. Facing flak from most of its trading partners, China (FXI) announced late last year that it would curtail its excess aluminum capacity.

Advantage for Alcoa: Chinese Aluminum Production Continues to Fall

According to data released by the International Aluminum Institute, China produced ~2.66 million metric tons of aluminum in July—a YoY decline of 2.4%. Now, Chinese aluminum production has fallen on a YoY basis in six out of the last seven months. On a year-to-date basis, Chinese aluminum production has fallen by ~3.1%—compared to the same period in 2015.

Welcome sign

The decline in Chinese aluminum production is a welcome sign for aluminum producers such as Alcoa (AA), Norsk Hydro (NHYDY), Rio Tinto (RIO), and Century Aluminum (CENX). Notably, we’re seeing a decline in Chinese aluminum production for the first time since December 2010.

The decline in Chinese aluminum production couldn’t have come at a better time for Alcoa. It’s in the process of splitting into two companies later this year. The upstream company, which would be a pure-play commodity producer, might have faced financial difficulties if aluminum prices were trading below $1,500 per metric ton levels. However, thanks to Chinese curtailments, the flow of metal leaving the country’s borders has come down this year. This is supporting aluminum prices.

Meanwhile, Chinese aluminum demand indicators also fell in July. You can read Should China’s Faltering Real Estate Indicators Bother Alcoa? to learn more.

In the next part of the series, we’ll see what Chinese curtailments would mean for the global aluminum market’s balance in 2016.