Aluminum: lack of rain sends Chinese production into crisis
Once again , Chinese aluminum production is in a fragile situation. In this case, the problem is mainly due to an energy supply crisis in the south-west of the country. Yunnan province, the aluminum production center of southern China, is reducing production of the metal due to a severe water shortage. This has in turn hampered the area's hydroelectric power supply. At present, the impact of this situation on the global price of aluminum remains unknown.
Hydroelectric power generation capacity in the area has reportedly declined significantly. In response, provincial leaders sent a notice to Yunnan Aluminum last month, urging it to reduce energy consumption, which could have an impact on the aluminum price index given the importance of local production. Yunnan Aluminum is one of the main smelters in the province, though not the only one. So far, the province has asked aluminum smelters to cut production on three separate occasions since last fall: by 10% in September, then by 20%, and most recently by 40%. A truly remarkable cut.
This issue comes at a time when China is still recovering from the COVID-19 restrictions. The economic recovery seems imminent and this will lead to an increase in the demand for raw materials, including aluminium. If successful, many experts believe this recovery will result in increased demand for metals such as aluminum.
China's role as a major consumer and producer certainly affects the price of aluminum
In February, manufacturing activity in the world's second largest economy continued to expand at the fastest pace in more than a decade. By the way, China is both the largest producer and the largest consumer of aluminum in the world. Therefore, both positive and negative news from the country can drastically affect aluminum prices.
According to the General Administration of Customs, China imported a record 374,321 tons in January-February this year. This represents an 11.3% increase over the previous year, underlining the pressure China is putting on the accelerator pedal.
Despite this, the global price of aluminum in these two months has made imports unattractive. For example, the benchmark contract for aluminum on the London Metal Exchange averaged a monthly average of $2,644 per tonne in January, its highest since May 2022. This was followed by a decline to an average of $2,373 a tonne in February.
According to Reuters, most of China's imports came from Russia. In fact, imports from Russia more than tripled in the two months, up 266.2%.
Get all the news on aluminum price index changes and other valuable commodity information.
China may decide to move production abroad
With provinces like Yunnan grappling with yet another energy crisis, major Chinese aluminum smelters continue to consider moving some of their production capacity overseas, especially to Indonesia. According to a report by SandP Global, the move, if adopted, would come at the right time for China. Indeed, Indonesia plans to ban the export of the main raw material, bauxite, starting next June.
Last year, China accounted for about 59% of global primary aluminum production. Although the country's authorities have set a ceiling for aluminum production at 45 MTA, last year it came close to this figure. This year, some experts predict that demand will be much higher and the aluminum price index will fluctuate. This could mean increased aluminum production or increased import dependency.
Of course, the reduction in rainfall and the resulting water cuts do not help the industry. There is already talk of further electricity shortages for the rest of 2023. Yunnan is looking to invest in clean energy, but if that fails, companies will have only one option: relocate to where energy is abundant and does not depend on from the rains.
Thanks to our Telegram channel you can stay updated on the publication of new articles from Economic Scenarios.
The article Aluminium: lack of rain sends Chinese production into a crisis comes from Scenari Economici .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/alluminio-la-scarsita-di-piogge-manda-in-crisi-la-produzione-cinese/ on Wed, 29 Mar 2023 07:00:28 +0000.