May 19, 2017 5:50 pm JST

Aluminum prices propped up by prospect of Chinese supply cut

Metal hovering 20% higher than in January; long-term outlook still hazy

Kobe Steel's aluminum plant in Moka, Tochigi Prefecture, in Japan

TOKYO/HONG KONG -- Aluminum prices are hovering at high levels, with investors sensing that China is finally getting serious about cutting excess capacity in the sector.

The benchmark three-month aluminum futures on the London Metal Exchange closed at $1,923 on Thursday -- up 20% from the beginning of the year. Over the past three months, the price has held relatively steady at around $1,900.

China, which supplies more than half the world's aluminum, has long been accused by the U.S. and European countries of government-sanctioned dumping of the metal and other industrial materials. This is seen as a factor undermining global commodities prices. 

But investors now see signs that Beijing -- motivated by its notorious air pollution and excess capacity problems -- is extending its commitment to supply-side reforms into the aluminum industry this year.

Local reports on the suspension of three mining projects in the western Xinjiang Uighur Autonomous Region, over violations of a production cut order in mid-April, appear to support that notion. The government has also ordered aluminum producers in 28 cities to slash output this winter.

These supply-tightening steps by China, coupled with demand trends, are supporting the higher prices. Demand for aluminum beverage cans is strong as the Northern Hemisphere heads into the summer. The auto industry is also gobbling up significant volumes.

Still, the long-term outlook for the global commodities market is anything but clear, due to uncertainty over the Chinese economy. "Given that China is the world's largest consumer of raw materials, this suggests weaker global demand for commodities, particularly industrial metals," noted Capital Economics.

"There is no real sense of direction in the [commodities] market," said John Johnson, CEO at CRU China, a London-based commodities consultancy.

Speaking at a conference hosted by Hong Kong Exchanges & Clearing, the LME's parent, earlier this month, Johnson said the aluminum market faces "huge risks" on both the downside and upside.

Yi Zhu, global head of metals and mining at Bloomberg Intelligence, was also at the conference. "We don't think that supply-side reform in the steel and aluminum sectors will be as easy as it was for the coal industry," she said, as these industries are less concentrated -- meaning the government cannot simply curb output by a few producers. She said private producers "could lobby local governments for certain regulatory approval" to maintain output.

Overcapacity, she said, could persist, with exports continuing "as long as overseas prices are higher."

Considering China's pivotal role, investors will be looking to the Communist Party's quinquennial congress this fall for clues on the market's future.

(Nikkei)

Nikkei staff writer Mariko Tai in Hong Kong contributed to this story.

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