Exclusive: Supply-side economics for aluminium

The metals and mining consultancy division of London-based CRU is hosting the 22^nd edition of its World Aluminium Conference 3-5 May 2017 in London.

In advance of that event, Recycling Today Media Group Editor Brian Taylor has interviewed CRU Principal Consultant Eoin Dinsmore to get his perspective on the global aluminium supply, demand and pricing situation.

Dinsmore says the topics explored in the following interview also will be explored in depth by panelists and guest speakers, including prominent aluminium industry executives, at the May event in London.

Recycling Today (RT): What factors in 2017 are serving to create either a supply or demand imbalance in aluminium? Are producers in nations outside of China still concerned about that nation’s level of production of finished and semifinished aluminium?

Eoin Dinsmore of CRU (CRU): Globally, there is a pretty good demand environment for aluminium. Demand growth in China continues to be firm. That really shows aluminium’s growth way in excess of what we see for steel, copper or zinc. In China, the growth is in transport, construction and electrical grid applications. There is around 3% to 4% demand growth outside China, but that figure is higher within China. On the demand side there, everything is good, including automotive industry demand and material substitution in favour of aluminium.

The ceiling on aluminium pricing this year, the negative factor toward supply-demand balance, is that there has been a lot of production growth in China. In the first quarter of 2017 there was around 17% Chinese aluminium production growth year over year, compared to January 2016. That comes with growth of just 7% in Chinese consumption.

Over the past years, we’ve seen waves of facility closures in China, including one in 2015. But since that point onward we’ve seen a very rapid increase in Chinese aluminium production. That is really starting to come through now on the year-on-year numbers—a very strong surge in production way in excess of Chinese demand growth. So, surpluses in the Chinese aluminium market have meant a reported 800,000 tonnes of excess so far in 2017 (through early March). In 2016, China consumed about 33 million tonnes overall. For now, Chinese producers are profitable, they are ramping up new capacity, and as a result the global market will be in surplus in 2017.

RT: What factors are contributing to any increases in global demand for aluminium? Is the auto industry continuing to play a leading role in growing demand for aluminium?

CRU: The materials substitution trend is continuing in some markets, in favour of aluminium. Over the past five years, outside China over half of total demand growth has come from the transport sector. Lightweighting, body panels, wheels are all seeing fantastic growth. In China, the largest factor is construction. Over the past 5 five years about one-third of aluminium has been consumed in the construction sector in China, about half as much from transport. In developed regions, the substitution from steel to aluminium in the transport sector has been the key driver to growth. CAFE (Corporate Average Fuel Economy) standards in the United States, emissions legislation in the EU have all contributed. Even the rollback of CAFE standards in the U.S. is unlikely to have a major effect on this.

RT: Given the answers to the above questions, is 2017 likely to witness a sharp upward or downward trend in aluminium pricing? Is increased volatility a possibility?

CRU: The real wild card for prices in 2017 is the result of air pollution in China. Today the Chinese government is focusing on energy-intensive industries in provinces near Beijing—those that use coal as a resource; they are targeting air pollution. That has meant the cement industry, but in 2017, the Chinese Ministry of the Environment (MOE) has ordered that aluminium smelters in 26 cities in the northern part of the country must cut 30% of their capacity over the winter heating months (November through March). This is the real wild card in the aluminium market at the moment.

We can look at the current market and say China is producing more aluminium than it is consuming; we can look at the rest of the world’s demand and actually see a shortage outside of China. The Chinese overcapacity overpowers that narrative, except for this pollution effort. Prices rising to $1,900 per tonne has been because of this Chinese policy.

The policy doesn’t even come into effect until November 2017. The prices have increased based on speculation around these cuts and the perceived impact when they do happen. The policy also targets alumina refineries and carbon anode plants. We’re not there yet; when we get to November 2017 we’ll see how strictly this policy is imposed.

Because the policy targets alumina, we’re already starting to see cost escalation in alumina and carbon anode prices. Operating costs are rising in China. Ultimately, Chinese producers are making too much metal and stocks right now are rising. And even if this Chinese policy is implemented strictly to the letter this November, it doesn’t make the Chinese imbalance go away. So too much of a price rise may have been baked in.

RT: What can you say about the role of secondary (recycled-content) aluminium in 2017 versus ten or 20 years ago? Has this sector increased its presence in the overall market?

CRU: The one thing to mention is that the major market for recycled-content aluminium is castings going to the transport sector. When we look at any region, the performance of the auto sector is a key determinant in how much aluminium demand there is in that region. We are not seeing the same increases in other end markets (construction, etc.), although in the rolled products sector there is a push to increase recycled content. What we’re seeing today is companies very eager to keep the value and close the loops from the semi-finished products they are selling to fabricators. The rollers really want scrap back from can makers and automotive producers and to segregate those alloys and get the most value from those materials. That material is valuable because secondary aluminium uses close to 95% less energy than primary, and there is real desire from companies to offer green products. It doesn’t mean higher aluminium recycling rates, but that the generators of that material are holding onto it to close a loop—say a 6000 series aluminium sheet clip staying within their process.

Post-consumer, UBCs (aluminium used beverage containers), auto shreds, demolition scrap, we are seeing increased recycling rates for that, but it’s a mixed bag. There are high UBC recycling rates in Europe, not as much in North America. That’s another closed loop with significant volumes going back into making new cans.

RT: How will some of the above questions be addressed at the CRU event in London in 3-5 May?

CRU: One of the key things we’ve been working on is addressing the Chinese aluminium scrap market. It has been one of the most dynamic sectors in the past 20 years, with of course a lot of scrap material going into China from Europe and North America. China is maturing, generating more of its own scrap. Understanding how that internal market is going to function is of critical import to anyone in the industry. It is a topic we have paid much attention to, and we are able to look at this from the broad perspective at CRU and look at the Chinese scrap cap—the practical limit for scrap consumption in China. In China, there is a big wire electric cable and construction market, but a relatively small transport market. We are going to present one of the more comprehensive reviews of what China might look like in the future, and I think for people in the recycling sector that is one of the most important things to understand in the coming years. Also, Chinese environmental policy—what does it mean and what are the risks involved in that?

China’s construction sector is so enormous, it dwarfs the transport sector. As an industry by itself, in 2016, China’s construction sector alone comprised 15% of global overall demand for aluminium. Wire and cable in China is an enormous success story—the country has been building out its electrical grid at a pace that no one thought was possible. The risk is China’s debt, but there could yet be more urbanisation to come.

Outside of China, transport is 1.8 times the size of construction sector demand for aluminium on average. But in China, construction creates twice the demand compared to transport. It’s a very different dynamic. So, the percentage for secondary aluminium there is thus, currently, a smaller percentage.

A number of trade actions, especially from the U.S.—such as one specifically on aluminium foil—also will be addressed. China exports about 4.5 million tonnes of aluminium products annually, with finished goods bringing that total to about 7 million tonnes. That means China fills about 13% of the rest of the world’s demand. That has happened over the course of just the last 10 years. The rest of the world feels the pressure. The U.S.-based Aluminum Association wants anti-dumping measures on foil imports. We are getting a real change in the global environment on trade. The uninterrupted growth in Chinese exports seems to be coming to an end. If the U.S. insists on protection, China will struggle to replace it as a market, and other regions will have to protect themselves in response.