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Alcoa: What the Chinese Aluminum Industry’s Outlook Implies

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Chinese aluminum industry’s outlook

China is the world’s biggest aluminum producer, consumer, and exporter. Developments in the Chinese aluminum industry tend to impact the global aluminum industry. Chinese aluminum exports interest companies like Alcoa (AA), Century Aluminum (CENX), and Norsk Hydro (NHYDY). In this part, we’ll look at the Chinese aluminum industry’s outlook and analyze what it means for producers like Alcoa.

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Demand slowdown

After strong 1Q17 demand prompted companies like Alcoa and Norsk Hydro to raise their 2017 demand forecasts, Chinese demand indicators have shown signs of moderation. In April, China’s car sales registered their biggest yearly fall since April 2015. The country’s April real estate and fixed asset investment data didn’t lift market sentiments.

Looking at recent indicators, China’s May manufacturing PMI (purchasing managers’ index) gave mixed signals. While the official manufacturing PMI came in better than expected, the private survey conducted by Caixin showed a contraction.

Supply

Aluminum prices seem to be factoring capacity curtailments in China in 4Q17 as the country moves to control rising pollution levels. However, cynics point to the steel industry where Chinese steel production hit a fresh monthly high in April despite capacity cuts. In our view, if Chinese aluminum production continues to register strong yearly growth in 2H17 without a commensurate increase in demand, we could see an increase in Chinese aluminum exports. Increased aluminum exports could pressure aluminum prices (XLB) (SOUHY).

Along with international factors, domestic factors could also drive US aluminum producers in the coming months. We’ll discuss the factors in detail in the next part.

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