Market Report Q3 2009 1 price analysis 1.1 Price up in China In the third quarter, the aluminum ingot price was in an upward trend in China. The demand for aluminum ingot usually becomes soft during July and August, but this year is an exception. Early July, the aluminum ingot price kept at around RMB13,600/t, but climbed up gradually later, and reached RMB15,220/t at the highest early August. In spite of the small recoil in September, the average price remained at around RMB14,970/t. The aluminum ingot market went stable and healthy during the third quarter, which can be attributed to the following reasons: Firstly, the demand recovered slightly. In order to fight against the economic crisis, China issued many beneficial policies like encourage household appliances consumption in rural areas by subsidy exchange out-of-dated appliances for new ones with preferable prices etc. Stimulated by the policies, the economy development was satisfying in the third quarter and the demand for aluminum ingot also recovered slightly. Secondly, inflation expectation covered the market. Due to the loose monetary policy and positive fiscal policy, the flowing capital supply increased, leading to strong inflation expectation; Thirdly, the flowing aluminum ingot supply became tight. In spite of the sufficient existing stocks in China, the flowing stocks were limited in the third quarter as Chalco held on from selling the metal. Fourthly, 3-month aluminum on LME went up. Driven by the depreciating US dollars and rising oil price, 3-month aluminum on LME climbed up in the past quarter, supporting the domestic market. Lastly, the export market for downstream products rebounded a bit. The aluminum price gap between the domestic market and overseas market narrowed due to the rising aluminum price on LME. Therefore, the aluminum products exporters in China took more opportunities to make transactions. In addition, China has raised the export tax rebate for several times since late last year.
ingot price curve from Jul to Sep in China (RMB/t) 1.2 on LME goes strong The aluminum market on LME went stronger in the third quarter than the second quarter. Since late last year, all the nations around the world declared loose monetary policy to stimulate the economy development. Entering the third quarter, most economy entities showed recovering sign, which strengthened the market confidence. In the meantime, the crude oil price also climbed up to USD70-80 per barrel from USD60 due to the depreciating US dollars. Therefore, aluminum on LME rose accordingly. In addition, the aluminum ingot stocks remained at a high level in the third quarter, but the rising speed slowed down as many producers in the world cut production early this year. Early July, 3-month aluminum settlement on LME was no more than USD1,600/t, but surpassed USD2,000/t in mid-august. Although the price declined a bit in September, the average price was still higher than USD1,800/t. With the recovering world economy, the international aluminum ingot market is expected to go up gradually.
3-month aluminum settlement curve on LME from Jul to Sep (USD/t) ingot stocks curve on LME from Jul to Sep (USD/t) 2 Alumina price and supply 2.1 Alumina price rises The alumina price rose rapidly in the third quarter in China. After many aluminum ingot producers resumed production in the past three months, the demand for alumina increased. Also, with the rising aluminum ingot price, Chalco raised its offer for both spot and long-term alumina. However, most major alumina producers did not expand production recklessly, and thus the alumina supply seemed not sufficient, weighing on the price. Chalco raised its spot alumina offer for three times from RMB2,300/t in July to RMB2,650/t late September, followed by other alumina producers, who increased the offer from
RMB2,100-2,150/t to RMB2,600-2,650/t. Meanwhile, the price for imported alumina with Australian origin also climbed up to RMB2,750/t from RMB2,150/t, much higher than the alumina with Chinese origin. Spot alumina offer curve by Chalco from Jul to Sep (RMB/t) Chinese origin alumina price curve from Jul to Sep (RMB/t)
Price curve for alumina with Australian origin from Jul to Sep (RMB/t) 2.2 Rising alumina output in China With the rising alumina price in China, most alumina producers in China began to earn profit, so they resumed the suspended production gradually. From the following chart, we can learn that the alumina output in the 3 rd quarter kept rising. However, the rising speed slowed down from September. Because many small-sized producers have realized full production, but the large-sized refiners were prudent in increasing production. According to the data from the National Bureau of Statistics of China, China produced about 2.21 million tons of alumina in September, up by about 8.1% year-on-year. The output totalized at 16.6 million tons from January to September, down by about 4.9% year-on-year. However, some officials predicted that with the rising output, the total alumina may reach 24 million tons this year, the same level with last year. Compared with the increasing aluminum ingot output, the alumina supply remains limited, especially in North China. We can witness the resumption situation in the 3 rd quarter by the following table: (ten thousand tons) Company Resumed production Running capacity Total capacity East Hope 50 200 250 Henan Zhongmei 3 40 40
Alumina Henan Kaiman Alumina 30 160 160 Shandong Lubei Chemicals Shandong Weiqiao Alumina Henan Xiangjiang Wanji Alumina Shanxi Xiaoyi Tianyuan Chemicals 40 40 100 100 350 400 40 80 80 10 10 25 Shandong 30 150 220 Chongqing Bosai Mining Group Guangxi Huayin Alumina 10 23 23 80 160 180 Chart for Chinese alumina output Jul-Sep (ton) 2,300,000 2,200,000 2,100,000 2,000,000 1,900,000 1,800,000 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% Output Monthly change 1,700,000 Jul Aug Sep -4.00% 3 ingot oversupplies 3.1 ingot capacity resumed rapidly Most aluminum ingot producers began to get rid of losses and encouraged by the beneficial policies issued by the local government, they rushed in resuming the suspended
production. Although China declared for several times to restrain aluminum industry expansion, it did not make senses. The following chart shows us the expanding aluminum ingot production. However, the expanding speed may slow down in the 4 th quarter as most producers have realized full production. According to released data by the National Bureau Statistics of China, the aluminum ingot output has reached 9.09 million tons until September, down by about 7.6% year-on-year. With the expanding capacity, the total output may reach 14.5 million tons this year, up by about 9% year-on-year. Given the slowly recovering demand, the aluminum ingot remains oversupplied. It is estimated that the existing capacity may reach 15 million tons per year at present in China. From the following table we can see those aluminum ingot producers who resumed suspended production in the 3 rd quarter: (ten thousand tons) Company Production reduction last year Production resumption this year Running capacity Total capacity Hubei Danjiangkou Baise Yinhai Henan Zhongfu Industrial Henan Zhongmai Huanan Chuangyua Qinghai Qiaotou Shandong Qixing 3 3 15 15 10 10 20 20 5 5 50 50 6.6 6.6 13.6 13.6 33 25 25 33 5 5 30 30 7 7 14 14 Shanxi Guanlv 3 3 12 12
Shanxi Zhaofeng Sichuan Aba Plant Sichuan Aostar Shandong Mountain Tai Yichang Yangtze River Zhejiang Huadong Zhengzhou Longxiang Chalco Guangxi Branch 12 12 12 12 10 5 5 20 17 5 13 25 10 10 10 10 6 6 13.6 13.6 10 10 15 15 3 3 5.5 5.5 10 7 12 15 Chart for Chinese aluminum ingot output Jul-Sep (ton) 1,250,000 1,200,000 1,150,000 1,100,000 1,050,000 1,000,000 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Output Monthly change 950,000 Jul Aug Sep 0.00% 3.2 World aluminum ingot output decreases Compared with the expanding aluminum ingot capacity in China, the output declined in the
other nations around the world. On the one hand, 3-month aluminum on LME remained at a low level and most producers in the world could not earn much profit, so they have no intention of expanding production; and on the other hand, the aluminum ingot stocks kept high-held on LME but the recovering demand went slow. The aluminum ingot stocks oversupply. According to data from WBMS, the world aluminum ingot market saw 1.361 million tons surplus from January to August, up from 730,000t in the same period of last year. Meanwhile, the demand for the metal declined by 3.079 million tons to 22.6 million tons from January to August. The following table is about the aluminum ingot production statistics for each continent from Jul to Sep by the International Institute. (Note: Asia excludes China) Unit: ten thousand tons Month Africa North America South America Asia West Europe Mid-east and Europe Atlantic Total Average daily output Jul 143 389 211 373 305 340 187 1,948 62.8 Aug 144 387 212 377 306 341 188 1,955 63.1 Sep 139 376 204 366 295 333 182 1,895 62.2 4 ingot and alumina import 4.1 ingot import decreases further In the 3 rd quarter, the aluminum ingot import continued to decline. 3-month aluminum on LME rose from USD1,600/t to USD2,000/t gradually from Jul to Sep, and the traders could not earn profit from the business. In addition, the imported aluminum ingot lost price edge and most buyers preferred to the metal with Chinese origin. Therefore, most traders suspended import business. It is learned that most imported aluminum ingot deals were fulfilled according to long-term contracts signed in the 2 nd quarter. The following chart is about the aluminum ingot import in the 3 rd quarter.
Chart for Chinese import of primary aluminum Jul-Sep (tons) 135,000 2500.00% 130,000 125,000 120,000 115,000 110,000 2000.00% 1500.00% 1000.00% 500.00% Import Year-on-year change 105,000 Jul Aug Sep 0.00% 4.2 Alumina import slows down The alumina price rose rapidly from RMB2,150/t to RMB2,300/t late June, leading to more profit space. Therefore, the alumina import rose to 610,000t in July from 530,000t in June. However, the crude oil price and aluminum ingot market started to go up from August and September and the alumina price also rose to USD320/t from USD260/t CIF China. The narrowing profit space reduced the alumina import in August and September. Chart for Chinese import of alumina Jul-Sep 700,000 600,000 500,000 400,000 300,000 200,000 100,000 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% Alumina import Year-on-year change 0 Jul Aug Sep -20.00% 5 Demand for aluminum products rebounds but unstable
In the 3 rd quarter, the demand for aluminum products became better than that in the previous quarter; and the production was on an upward trend accordingly. The aluminum products output reached 1.59 million tons in September, up by about 4.5% compared with that in the previous month. The well-going auto industry in the 3 rd quarter driven the demand for aluminum alloy ingot greatly. We can see the rising aluminum alloy ingot output from the following chart titled as Chinese Products Output and Monthly Change from Jul to Sep. In September, the output reached 227,000t. Also, the chart shows us the rising aluminum sheet and strip output. However, the aluminum sections industry, the field with largest consumption, did not go well. The aluminum sections output was around 368,000t in July, but decreased to 355,000t in September. The sections can be classified as building and industrial sections. In the 3 rd quarter, the building industry appeared weak due to sluggish real-estate market, so the whole demand for aluminum sections was discouraged. Chart for total Chinese al products Jul-Sep (ton) 1,600,000 1,580,000 1,560,000 1,540,000 1,520,000 1,500,000 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% Output Monthly change 1,480,000 Jul Aug Sep -8.00%
Chart for Chinese Specified al products Jul-Sep (ton) 400,000 350,000 300,000 250,000 200,000 150,000 100,000 Al sections Al sheets Al strips Al foils Al alloys 50,000 0 Jul Aug Sep 6 Correction for aluminum ingot market As a whole, the aluminum ingot market went well in the 3 rd quarter. However, with the releasing capacity, the aluminum ingot stocks may continue to be oversupplied, weighing on the price. In addition, supported by the alumina cost, the aluminum ingot price may not drop greatly; or else, those producers who just resumed production will not afford to it. In the long run, the aluminum ingot price is expected to stay around RMB14,700-16,000/t in the 4 th quarter. The recovering domestic economic development in the 3 rd quarter was mainly stimulated by investment but not demand. If China does not issue new beneficial policies continuously, the effect of the formal policies may disappear. The economists show different opinions about the economy late this year. Therefore, the aluminum ingot producers should not be too optimistic about the future market and expand production recklessly. In recent months, the international trading protectionism showed up. Therefore, the downstream plants should keep an eye on it and work out some tactics in time.