By Xinlin Chen
The outbreak and subsequent spread of the coronavirus (COVID19) is fuelling uncertainty for all the base metals, including the aluminum market. The price for aluminum on the London Metal Exchange (LME) hit a two-year low of $1,687 per metric ton (mt) in early February. It has since recovered some, but the market remains wary of weaker economic activity and demand growth, logistical backlogs and the impact on output across the value chain.
Even before the virus outbreak, Wood Mackenzie’s (WoodMac) base case outlook for the metal was already showing a market moving into surplus, with all the risks pointing to a much larger oversupply position. For the time being, there are many permutations as to the outcomes from the coronavirus outbreak. What is clear is that China’s economy and its aluminum sector command a far greater share of the global totals. Any significant dislocation in China will have far reaching reverberations.
Downstream aluminum output takes an immediate hit. Semis exports to follow? WoodMac believes that the plants that rely on ingots or billets produced at smelters some distance away are now struggling to secure adequate supplies of metal. However, semis plants that purchase in-situ liquid metal — around 12.4 million mt in 2019 — are unlikely to be affected. If downstream output does not recover soon, WoodMac expects semis exports to fall rapidly through to March. Given that most downstream facilities typically operate at no more than 50%-65% utilization, there is enough “give” to raise operating rates higher once the virus outbreak has been contained. In effect, the impact on demand in China for the year may not be as significant as the numbers may suggest over the short-term if the epidemic is contained.
Logistic bottlenecks trigger alumina cuts. The coronavirus outbreak has disrupted the delivery of raw materials to alumina refineries, especially in Shanxi and Henan provinces. These two provinces account for 41% of alumina refining capacity in China and supply to the smelting hub in the Northwest. At the time of writing, refineries in Shanxi province were reported to have 10-20 days of bauxite stock compared with 1-2 months. Meanwhile, refineries in Henan province with captive mines are operating as usual but those using third-party or imported bauxite are struggling to secure the required tonnages to maintain normal operations.
Apart from bauxite, refineries are also short of caustic soda supplies. Some caustic plants have suspended production, thereby resulting in a shortage. Coal gas is also in short supply forcing a few refineries to switch to natural gas, which has increased costs.
Stranded alumina stock inland… Refineries that are operating, as usual, are unable to truck alumina to smelters due to transport restrictions. Smelters in Xinjiang and Inner Mongolia that are farther inland are the most impacted. Some smelters in the province are operating with low levels of alumina stock. However, smelters in Xinjiang are low cost and, therefore, better placed to pay above market rates for alumina.
…increases the demand for imported alumina. Smelters in East Inner Mongolia can receive alumina from the Bayuquan port, but smelters in the west of the province have insufficient alumina stock. These smelters must secure timely supplies from refineries in either Shanxi or Henan to avoid production cuts.
What is the risk of aluminum production cuts? Smelters in Guangxi and Guizhou have indicated that they are
operating as usual but there are concerns around the timely shipment of anodes. Pitch, which is used in anode production, is also facing logistic bottlenecks. The shortage is so acute that even smelters with captive carbon plants in Shandong and Shaanxi are purchasing anode blocks as they cannot produce anodes.
Refining cuts in China could reach 5.2 million mt (annualized), representing 7% of the country’s estimated production.
Xinlin Chen is Wood Mackenzie’s aluminum associate.