When analyzing supply conditions in the global aluminum market, investors must consider the situation in China and the rest of the world.
Chinese demand accounts for about half the world’s aluminum consumption, and the Mainland has added smelting capacity aggressively over the past decade to keep pace with strong demand growth in its domestic construction and manufacturing industries.
However, China’s demand for aluminum has weakened with the mainland economy, resulting in excess productive capacity.
Beijing has moved to shutter smaller, less-efficient plans as part of its effort to alleviate the nation’s pollution problems and excess industrial capacity. The timing of these rationalizations remains uncertain, though local reports indicate that some smaller plants have been bulldozed.
Believe it or not, the overcapacity in China has only limited implications for the global aluminum market; Beijing imposes a 15 percent export tax on primary aluminum, so large-scale dumping of excess Chinese production on the global market appears unlikely.
In addition, Chinese smelters face several headwinds, including rapidly rising electricity prices and neighboring Indonesia’s recent ban on bauxite exports–the former exporter had been the Mainland’s leading supplier. Accordingly, rising input costs should elevate domestically produced aluminum prices, making exports even less attractive.
Bottom line: Although the Mainland will produce a surplus of aluminum in 2014, investors shouldn’t expect a deluge of inexpensive exports from China to depress global prices.