LONDON- World aluminum output rose by 2.5 percent to a record 65.3 million tons last year, with producers lifting run-rates as the aluminum price rebounded from its March lows.
The COVID-19 recovery has been led by China, where booming demand has seen the world’s largest producer turn net importer of primary metal this year.
China’s giant aluminum smelting sector responded to soaring local prices with a 1.8-million ton lift in annualized production over the second half of 2020.
November saw annualized run-rates exceed 39.0 million tons for the first time ever, according to the International Aluminum Institute.
This supply surge is coinciding with a wind-down in demand ahead of the Chinese Lunar New Year holiday period, with most analysts expecting prices to weaken over the coming weeks and months as the market digests the extra production.
This is how the aluminum market has played out for many years. China’s seemingly infinite ability to bring on new capacity has been the single largest hindrance to any sustained price rally.
Things, however, may be changing, with even Chinese producers now talking about peak aluminum production.
China may be running out of new capacity to flex as national production edges ever closer to the country’s capacity cap of 45 million tons per year.
The government has since 2017 been enforcing a strict old-for-new policy in the aluminum sector. New smelters have only been permitted when matching older capacity is closed.
On paper there is six million tons of potential flex between the cap and November’s run-rate of 39 million tons. In reality, the gap is much smaller than it appears.
There are currently around three million tons of shadow capacity sitting idle, according to AZ China consultancy.
These smelters are deemed “illegal” by the Chinese authorities, mostly because they failed to tick all the bureaucratic boxes of the permissioning process.
“As best as we can tell, no operators have been tempted to secretly energize their pots,” AZ China said in a September note to clients.
However, “it does act as a good reminder that the maximum theoretical limit of 45 million tons cannot be reached based on today’s rules”.
Specifically, the “illegal” smelters don’t have the replacement capacity licenses they need to activate their production lines.
Strip these operators out of the equation, and Chinese aluminum production is much closer to the capacity ceiling than it might at first seem.
The Chinese government could of course allow the “illegal” operators to start up. It could also lift the capacity cap.
Complicating the picture, however, is Xi Jinping’s pledge in October last year that China would reach peak carbon emissions before 2030 and become carbon neutral by 2060.
That’s a big problem for a sector that in 2018 was 90 percent reliant on coal power to energize its potlines.
