Is China nearing peak aluminum after record 2020 output?

The covid-19 recovery has been led by China, where booming demand has seen the world’s largest producer turn net importer of primary metal this year.

China’s giant aluminum smelting sector responded to soaring local prices with a 1.8-million tonne lift in annualised production over the second half of 2020.

November saw annualised run-rates exceed 39.0 million tonnes for the first time ever, according to the International Aluminium Institute.

This supply surge is coinciding with a wind-down in demand ahead of the Chinese Lunar New Year holiday period, with most analysts expecting prices to weaken over the coming weeks and months as the market digests the extra production.

This is how the aluminum market has played out for many years. China’s seemingly infinite ability to bring on new capacity has been the single largest hindrance to any sustained price rally.

Things, however, may be changing, with even Chinese producers now talking about peak aluminum production.

China’s capacity cap

China may be running out of new capacity to flex as national production edges ever closer to the country’s capacity cap of 45 million tonnes per year.

The government has since 2017 been enforcing a strict old-for-new policy in the aluminum sector. New smelters have only been permitted when matching older capacity is closed.

On paper there is six million tonnes of potential flex between the cap and November’s run-rate of 39 million tonnes. In reality, the gap is much smaller than it appears.

There are currently around three million tonnes of shadow capacity sitting idle, according to AZ China consultancy.

These smelters are deemed “illegal” by the Chinese authorities, mostly because they failed to tick all the bureaucratic boxes of the permissioning process.

“As best as we can tell, no operators have been tempted to secretly energise their pots,” AZ China said in a September note to clients.

However, “it does act as a good reminder that the maximum theoretical limit of 45 million tonnes cannot be reached based on today’s rules”.

Specifically, the “illegal” smelters don’t have the replacement capacity licences they need to activate their production lines.

Strip these operators out of the equation, and Chinese aluminum production is much closer to the capacity ceiling than it might at first seem.

China’s power problems

The Chinese government could of course allow the “illegal” operators to start up. It could also lift the capacity cap.

Complicating the picture, however, is Xi Jinping’s pledge in October last year that China would reach peak carbon emissions before 2030 and become carbon neutral by 2060.

That’s a big problem for a sector that in 2018 was 90% reliant on coal power to energise its potlines.

The tension between the requirements of the aluminum market and the constraints of China’s carbon ambitions are already surfacing.

China’s two biggest aluminum producers last week issued a joint call for the sector to reduce emissions, conserve energy and produce low-carbon metal as part of the national plan to achieve carbon neutrality.

State champion Aluminum Corp of China and top private sector producer China Hongqiao Group might seem unlikely bedfellows, but both have large amounts of capacity powered by hydro in Yunnan province.

Both are speaking from a position of “green” strength.

That however should not detract from the significance of their joint call for strict capacity and output controls.

The real bombshell is a recommendation that production and capacity of both primary aluminium and raw material alumina should peak in the Five-Year Plan period running from 2021-25.

No targets were mentioned, but this unusual public-private call to arms suggests the political landscape of China’s aluminum sector is shifting.

Rest of the world’s power problems

If China is now close to its effective capacity cap, it could be a window of opportunity for producers everywhere else.

Chinese exports of semi-manufactured aluminum products such as foil and tube have hollowed out demand for primary aluminum in other markets as well as keeping a tight lid on prices over the last decade.

If the dynamic of excess Chinese production being exported diminishes, it should be good news for everyone else.

However, many producers outside of China have their own power problems.

While new capacity has been brought on stream in India, the Gulf and Russia over the last couple of years, older smelters are quietly giving up the ghost.

Alcoa last year curtailed its Intalco smelter in Washington State and was due to close its San Ciprian plant in Spain before pausing the process in December after a court challenge.

The Tiwai Point smelter in New Zealand has just narrowly escaped the axe, but owner Rio Tinto is still reviewing the future viability of its ISAL smelter in Iceland.

The core issue in all these cases is less the price of aluminum than the cost of power in local markets.

Aluminum smelters are power-hungry plants, and those in the developed world are being squeezed out by rising demand for electricity.

It’s ironic that aluminum production is being hobbled by the very sector that needs it most for decarbonisation, whether it be directly in the form of solar panels or indirectly in the lightweighting of electric vehicles.

This continued attrition of older smelter capacity also poses a big question mark as to what the world will do if the Chinese aluminum juggernaut does run out of road.

That seemed a remote possibility until a couple of years ago. With the country’s top two operators calling for national production to peak over the next five years, it seems a lot less remote today.