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Commodities

China Hongqiao chief dismisses aluminium overcapacity concerns

PUBLISHED : Monday, 15 August, 2016, 4:25pm
UPDATED : Monday, 15 August, 2016, 10:35pm

China Hongqiao, the world’s largest aluminium producer, rejected concerns the Chinese aluminium industry has a major overcapacity problem and that prices of the metal may fall due to the supply overhang.

Chief executive Zhang Bo said China’s high demand for the lightweight industrial metal and improving “self-discipline” in production and capacity expansion has already resulted in a much healthier state than some analysts’ believe.

The nation accounted for 53 per cent of the global demand of 30 million tonnes in the first half of the year.

Asked if he agrees with an analyst’s view that aluminium prices may fall 11 per cent in the next four years amid oversupply, Zhang said on Monday: “Our view, and also the view of our industry’s association is that, given the industry’s overall plant utilisation exceeds 80 per cent, and over 80 per cent of the smelters are profitable, nobody [should] have the idea that the industry is in major overcapacity.”

He also noted mainland China’s 8.6 per cent year-on-year first-half aluminium demand growth has far outstripped output growth of 1 per cent, which has “made a great contribution” towards restoration of the global industry’s demand-supply balance and price recovery.

Zhang expected the transportation, electronic and electrical industries to continue to lead demand growth in the mainland.

China Hongqiao on Friday posted a 20.7 per cent year-on-year rise in net profit for the first half to 3.28 billion yuan as a 9 per cent fall in selling prices was more than offset by a 25 per cent growth in sales volume.

The company is forecast by nine analysts to post a pre-tax profit of 7.46 billion yuan in the full year, up 19 per cent from underlying pre-tax profit of 6.26 billion yuan last year when the impact of a foreign exchange loss from the yuan’s devaluation was excluded.

Aluminium prices in China have rebounded to around 12,200 yuan a tonne at the end of June from 10,595 yuan at the start of the year, as smelters on the mainland and abroad mothballed capacity at loss-making prices.

Zhang expects prices to remain stable at around 12,500 yuan in most of the year’s second half.

But ANZ’s senior commodity strategist Daniel Hynes, who predicts that prices will not exceed US$1,700 “on a sustained basis until 2018”, noted Chinese output has been rising sharply in the past few months, which has “[undone] the good work that capacity closures elsewhere around the world have been achieving”.

“Aluminium – like steel – continues to underperform as it struggles to remove the shackles of China’s industrial overcapacity,” he wrote in a report earlier this month, adding that aluminium has trailed behind most non-ferrous metals except copper in price gains since late May.

“The promise of capacity closures [of 4.5 million tonnes per annum] at the start of the year are fading quickly, with production picking up strongly in recent months.”

The industry’s daily output volume has surged from a low of around 75,000 tonnes early this year to 90,000 tonnes, not far short of last year’s highest levels, Hynes noted.

The promise of capacity closures [of 4.5 million tonnes per annum] at the start of the year are fading quickly, with production picking up strongly in recent months
Daniel Hynes, ANZ senior commodity strategist

He expected the pick up in pace of production restart at the mainland’s mothballed smelting facilities in the second-half of 2016 to continue, with nearly 200,000 tonnes of annual capacity having resumed in the second quarter and another 300,000 tonnes due to come back in the third quarter.

Although China had targeted earlier this year to cut 4.5 million tonnes of outdated aluminium capacity, Hynes said some 3.7 million tonnes-a-year of new capacity is scheduled to come on stream in the second half of this year alone.

China Hongqiao is among a handful of privately controlled Chinese firms that aggressively expanded its capacity in aluminium smelting, alumina refining and power production over the past few years.

Alumina, derived from bauxite mining and processing, is the raw material for aluminium production.

The company expanded its annual aluminium smelting capacity by 29.8 per cent to 5.89 million tonnes in the 12 months to June 30, and Zhang expects it to reach 6.5 million tonnes by year-end.

With rising scale of its own captive power plants and self-built alumina plants funded by low-cost domestic borrowings, Zhang said China Hongqiao has increased its cost advantage from “integrated operation” substantially, as it build a large alumina plant in Indonesia and invested in a bauxite mine in Guinea, West Africa.

It expects to be self-sufficient in alumina supply by the end of next year.

But Zhang conceded its power price advantage against its mainland rivals has been shrinking as power price reform has reduced rivals’ energy costs. “We no longer consider lower power cost our core competitive advantage,” he said.

China Hongqiao’s shares have risen 41.9 per cent since the start of the year, outperforming the 4.6 per cent gain in the Hang Seng Index. They were trading 4.1 per cent higher at HK$6.54 at 2:29pm on Monday.