THE AZ CHINA RED BOOK

Transcription

1 THE AZ CHINA RED BOOK Q AZ China s definitive analysis of China primary aluminium market, with the most comprehensive study of the cost of production, together with competitive analysis, trend analysis and AZ China s predctions for the future of the market and the price. Volume 1, number 1

2 The information contained in this report may not be reproduced in whole or in part or transmitted to any other person without AZ China Limited s prior written consent. This report constitutes a commercial communication and, and although it is based on sources believed to be reliable, no guarantee is made as to the accuracy, currency or completeness of the information. Any opinions expressed are subject to change without notice. None of the information included in this report should be interpreted as investment or legal advice and all recipients should seek to independently determine whether the information included is suitable, proper or appropriate, based on the recipients' own judgement and / or upon the advice the recipients receive from any advisors. This report may contain assumptions or include projections, forecasts, and scenario analyses. Actual events or conditions may not be consistent with, and may differ materially from, those assumed. This report is made available by AZ China Limited for information purposes and must not be further distributed to any third parties. AZ China provides as accurate analysis, graphs and trends as possible, which may be updated subsequently if import and export data previously used is found to be erroneous. Q The AZ China Red Book. 2

3 Regular features Feature Stories IN THIS EDITION BAUXITE BLUES China deals with the new Indonesian export tax. We analyze the cost and market impact of the new tax. Page 6 SEMIS SENT PACKING - OVERSEAS China s exports of semi-finished aluminium remain as strong as ever, despite some export markets being in a parlous condition. Page 15 WESTWARD HO! Our latest update on the move by China s primary aluminium sector to move to cheaper power sources. Page 19 THE KEY NUMBERS Our table of the key production and cost numbers for China s aluminium industry. Page 5 CASH COST CURVE Our regular analysis of the cash cost curve, including the shifts in cost in the last quarter, which corporations are most (and least) profitable, and our outlook for costs for the next 2 quarters. DEMAND ANALYSIS An in-depth look at the various markets for aluminium, including construction, transport, packaging and electrical, within the context of China s macro economic health. PREDICTIVE ANALYSIS Our predictions and projections for China s primary aluminium market for the next two quarters. Q The AZ China Red Book. 3

4 TABLE OF CONTENTS Bauxite Blues... 7 Bauxite tax has limited impact on the aluminium market... 7 Indonesian bauxite tax The story... 8 Impact limited to Shandong... 8 Substantial increase in alumina cost for affected smelters... 9 Cost increase at around 1.6% for Shandong smelters... 9 Bauxite tax adds little pressure to cash costs of affected smelters... 9 Production adjustment a reality Limited effect on aluminum market Delayed effect of tax Shifting to other foreign suppliers in the near term is not likely What it means for domestic bauxite supply Switching to other foreign suppliers Importing alumina will not produce cost savings Bauxite alternatives Semis Sent packing - overseas Westward Ho! Tap into coal Moving to the West makes sense on a cost basis Transport cost a minus Railway capacity likely to strain Partial dependence on semis exports, west-east divide Infrastructure investment coming back Absorbing metal supply Changing model Cash Cost Curve Analysis Cash cost curve reveals unprofitable smelters Average cost shows variable profitability Distribution shows normality for cost and skewness for capacity Top quartile smelters have much higher electricity costs Electricity prices drive regional variances Corporate structure makes a difference Dynamic modeling shows critical cost in electricity Electricity has the most effect on total cost Competitor analysis Demand side Analysis End-use industries to experience slowdown Demand growth face structural challenge Long term outlook for end markets face opportunities and risks Macro Economic Analysis Quarterly declines will lead to lower annual growth Industrial activities show mixed signals... 47

5 Consumption remains resilient Inflation subsides Property prices continue to be curbed Trade shows weakness as overseas demand tanks More money in the system Cyclical contraction will continue Growth will return when world growth come back on track Policy of fine-tuning will cushion cyclical slowdown Further slow down in internal growth is expected Price under control Downside risks Supply Side analysis The biggest producer to see slowdown in production Production will moderate to reflect slower demand Deficit is expected Structural change in Supply Energy efficiency and energy intensity Conclusions and outlook Appendix Q The AZ China Red Book. 5

6 THE KEY NUMBERS Quarter (f) Aluminium production 3,989 4,003 4,629 17,500 19,500 21,500 Alumina production 7,581 8,205 8,995 31,000 39,850 43,000 SHFE* spot (RMB/t) 16,215 16,680 15,990 15,733 16,724 16,900 Year (USD/t) 2,379 2,547 2,533 2,348 2,618 SHFE* 3 month (RMB/t) 16,400 15,805 (USD/t) 2,598 2,475 Avg. Cash Cost all plants 14,808 15,158 14,736 14,797 15,099 Lowest Cost plant (RMB/t) 12,856 11,286 10,829 11,253 11,372 (USD/t) 1,886 1,723 1,716 1,680 1,780 Highest cost plant (RMB/t) 16,818 16,753 16,999 16,667 17,057 Total capacity above Avg. SHFE** , % of total Avg. exchange rate * Includes 17% VAT ** No adjustment for VAT, premiums or non-cash costs Aluminium production is on track to achieve about 21.5 million tonnes in That s despite some closure and some delays to new smelters starting up. It is also in spite of a generally softer economic environment. The metal price however, will stay around the RMB16,000 mark, or rise a little higher, as finance deals take more metal out of the reach of regular consumers. The average cash cost of production has dropped year on year, thanks to a gradual shift to the Northwestern provinces. The best performing plant continues to operate below the RMB12,000 barrier. However, the most significant feature of the cost curve is the percentage of capacity sitting above the average SHFE price. In Q1 of this year, we estimate that about 3.3 million tons of capacity was above the spot price, with the highest cost plant now some RMB500 above on a cash basis. Removing VAT at 17%, adding premiums of RMB855 and adding non-cash items, the worst performing plant is now losing money at a rate of RMB2000 per ton or more. Although the total percentage in the red seems high, a similar percentage occurred in This number changes because the SHFE price moves much more than the cash cost of production. See the section on cash costs for more details.

7 FEATURE STORIES BAUXITE BLUES China deals with the new Indonesian export tax. We analyze the cost and market impact of the new tax. Bauxite tax has limited impact on the aluminium market Q The AZ China Red Book. 7

8 WESTWARD HO! Our latest update on the move by China s primary aluminium sector to cheaper power sources. In this edition, we examine some of dimensions of the transition, and whether they will be ready and able to support the move. Some commentators have questioned the Chinese aluminium industry s push to relocate smelting capacity to the north west of the country. It has been argued that China would be better off importing aluminium than devoting scarce resources in a remote corner of the country. One prominent aluminium industry executive stated at a conference recently that some developments were driven by greed rather than what was good for the country. Another doubted that the move to the northwest would even succeed, quoting obstacles such as the lack of water needed for the turbines inside the power stations that are being built in the regions. The development of strategic industries remains a key national goal in the 12th Five-Year plan. While the economy is poised to shift from being export and investment led to one that relies on domestic consumption, emphasis continues to be given to the notion of self-sufficiency. It simply means that China will develop industries primarily inside of China instead of importing from overseas. This inevitably relies on the available resources domestically and those only available overseas. For the aluminum industry, key raw materials include bauxite and the coal to power the electricity needed for smelting. The bid to remain self-sufficient will remain a key focus for at least the rest of this 5-year cycle. The three main policy objectives for moving West are: Q The AZ China Red Book. 8

9 RMB/T RMB/T CASH COST CURVE ANALYSIS 18,000 China: Cash Cost Curve (31 Mar 2012) by Capacity 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10, Accumulative Capacity (Percentiles) China: Cash Cost Curve (31 Mar 2012) by Production 18,000 17,000 16,000 15,000 14,000 13,000 12,000 11,000 10, Accumulative Production (Percentiles) Cash cost curve reveals unprofitable smelters Our cost curve reveals that there are 27 smelters with total costs above 16,000 per ton by the end of March Given the Shanghai metal price sitting at around 16,000 per ton currently, these smelters are making a theoretical loss. 1 We have been compiling cost and consumption data since the start of All data for all operating smelters is loaded into a special software package called STATA, which allows us to prepare regressions and other sophisticated analyses. We can also examine smelters based on selected periods or points in time. However, for a smelter to be included in the analysis, we must have obtained at least 2 years data. New smelters that have started recently, or those that have closed, are excluded in the cost curve charts and tables presented in this report. Q The AZ China Red Book. 9

10 The smelters in the 1st, 2nd and 3rd quartiles are making theoretical profits or APPENDIX CHINA S PRIMARY ALUMINIUM CASH COST OF PRODUCTION BY SMELTER Plant No Province Started Operations Company Structure Amperage Total Cash Cost (RMB) Production (Kt) 1 Fujian 1958 State-owned Shandong 2003 Publicly Listed Company Qinghai 2002 Private Q The AZ China Red Book. 10