November 2, 2022

Starting in mid-November, three aluminum smelters in China’s Henan province will curtail approximately 110,000 mt of combined annual capacity due to unprofitability and pollution controls, according to Bloomberg and Shanghai Metal Market.  AEGIS notes that this unprofitability likely stems from soaring electricity costs due to low hydropower supply across several key Chinese aluminum production regions. According to Shanghai Metal Market, production costs for Henan’s province smelters exceed 19,000 yuan/mt, or $2,618/mt. This compares to LME aluminum prices, which are $2,232.50/mt in the cash (November 1 settle) and $2,255/mt in the 3M Select (7:35 AM CST). Henan province has approximately 2 million mt of aluminum smelting annual capacity, representing nearly 5% of the country’s total. (Source: Bloomberg, Shanghai Metal Market)

AEGIS notes that these curtailments are the latest in a growing list of cutbacks by Chinese aluminum producers. In mid-September, Shanghai Metal Market reported that aluminum smelters in Yunnan province might cut production by 20 to 30%, or 1 to 1.5 million mt, far more than the 500,000 mt reduction requested by local authorities. We also note that Chinese aluminum production continues at a blistering pace, despite the recent curtailments.  Aluminum production averaged over 114,000 mt/day in September, a new record daily volume; however, total monthly production was 3.42 million mt last month, down slightly from the record 3.51 million mt in August, according to China’s National Bureau of Statistics.

Will more production cuts cause LME aluminum prices to rally? Prices are down nearly 20% in 2022, as the last trade on the 3M Select contract was $2,255/mt (7:35 AM CST). Aluminum end-users might consider using the recent dip in prices by applying simple hedges involving swaps and call options. Such positions are standard for consumer hedging, but they can result in opportunity costs or cash costs if metal prices decrease. Please contact AEGIS for specific strategies that fit your operations. (11/2/2022)

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