Covid-19 will tilt aluminium axis further towards China

China's giant aluminium production sector seems to have emerged unscathed from the Covid-19 crisis.

The country's annualised production rose by 718,000 tonnes to 36.56 million tonnes over the first five months of this year, the latest estimate from the International Aluminium Institute (IAI) found.

China's share of global output touched 57 percent in May. Since the IAI first started using its own assessments of Chinese production, the country has only exceeded that level a couple of times in 2018, a year of record national output.

Annualised run-rates in the rest of the world decreased by 612,000 tonnes over the January-May 2020 period. That decline in part reflected curtailments because of lockdowns but low international prices are starting to take a toll on Western smelters.

China is already the world's largest aluminium producer.

It's hard to see how its dominance will not increase, particularly since the US Administration's venting of its aluminium frustrations on Canada reduces the chances of multilateral action to stop it.

China - ramping up again

Chinese aluminium production fell last year for the first time in a decade. That was largely the result of unplanned outages at a couple of the country's biggest producers and the analysts' consensus was always for a renewed growth spurt this year.

Annualised monthly production rates jumped the 36-million level at the start of 2020 and have remained above it ever since.

There was a small dip in run-rates in March at the peak of China's lockdowns, which coincided with a price trough on the Shanghai Futures Exchange aluminium contract.

But cumulative production was still up by 2 percent in January-May after a 1.0 percent contraction last year.

Shanghai prices have rebounded from their March slump, easing some of the previous financial stress on the country's operators.

New smelters, meanwhile, continue to come online. Yunnan Aluminium announced last month the commissioning of a 500,000-tonne per year plant in the Wenshan region of the province.

Wenshan is an emerging Chinese production hub as producers migrate from older coal-powered smelters in other parts of the country towards Yunnan's cleaner hydro power.

In principle, such new capacity has to be matched by the closure of older capacity but the process inevitably involves capacity creep because the new smelters are more efficient than those they are replacing.

In practice, it's not always clear whether the older capacity was even operating.

Either way, almost half way through 2020 and Chinese aluminium production is clearly growing again.

Moreover, Beijing's mandated cap on national capacity at 45 million tonnes allows plenty of leeway for further upwards creep.

Covid-19 recovery but price pain grows

As with their Chinese counterparts, most Western smelter operations have not been directly affected by Covid-19.

The notable exception was Argentinian producer Aluar, which temporarily shuttered half of its 460,000-tonne per year capacity during the country's lockdown.

The country's aluminium production was down an average 17 percent over the January-May period with Aluar operating at 54 percent of capacity in May, local consultancy Economic Trends found.

The heavier toll from Covid-19 has been on demand and price. London Metal Exchange (LME) inventories have been rising steeply as unsold metal spills from the physical to the paper market, where it can be financed.

The LME price is trading around $1,590 per tonne and struggling to stage any significant recovery from last month's four-year low of $1,460.

The resulting squeeze on smelter margins is starting to take a toll.

Alcoa has announced the permanent closure of its Ferndale smelter in the US state of Washington. The plant was already operating at reduced capacity of 230,000 tonnes.

The US producer has also initiated talks with unions at its similar-sized San Ciprian smelter in Spain over a possible closure decision.

Rio Tinto has two smelters, one in Iceland and one in New Zealand, under strategic review.

True, there are expansions under way elsewhere.

Gulf production is booming, up 13 percent last year and a further 6 percent in January-May this year as Aluminium Bahrain ramps up its new 540,000-tonne per year Potline 6 expansion.

Malaysia's Press Metal is also aiming to lift capacity from 760,000 tonnes per year to 1,080,000 through its Phase 3 smelter due for commissioning at the start of next year.

But by that time at least one more non-Chinese smelter is likely to have bitten the dust.

The financial crisis a decade ago took out a swath of Western aluminium smelters with China's share of global production rising to 49 percent at the end of 2012 from 29 percent at the start of 2009.

Covid-19 is generating the same bearish mix of weak demand, surplus metal, low prices and Chinese production exuberance.

Political Disunity

As China's smelter capacity has grown so too have its exports of semi-manufactured products.

Semis shipments have slowed this year to the tune of 10 percent as overseas demand collapsed but at 1.5 million tonnes, the cumulative total is still a lot of aluminium, particularly in the current demand environment.

China's exports have long generated international push-back, often in the form of punitive duties.

There had been building momentum towards a multilateral forum to engage directly with Beijing over its continued build-out of aluminium capacity.

Unfortunately, President Trump doesn't do multilateral forums. He chose instead to impose a blanket tariff of 10 percent on all US imports with exceptions for a couple of close allies

Canada was exempted last year but is faces renewed tariffs after an alleged surge of metal entering the US market.

Such national friction means there is no international political check on China's continuing creep towards that elevated 45-million tonne capacity threshold.

In its absence, there is no reason for China not to continue what it is doing, which is to produce more aluminium.