Chinese aluminum smelters are running hot and are starting to test both capacity constraints and limitations on demand.
Daily output in the world’s biggest producer hit an all-time high of 129 000 t last month, propelled by record margins and a global shortage of the metal caused by the war in Iran. Investment banker Citigroup expects prices to rally further as the market contends with its biggest supply shock in 50 years.
However, the costs of maximizing production are now beginning to surface. Exports haven’t been enough to offset tepid domestic demand and profitability may have peaked. Domestic inventories have more than doubled this year to 1.37-million tons, marking a six-year high.
“There’s been a heated discussion around overproduction, because inventories are piling up so rapidly,” said Chen Jingmin, an analyst with Zijin Tianfeng Futures. “Chinese demand growth this year is only around 1%, and even turned negative in January and February.”
The aluminium sector is already rubbing up against an annual capacity ceiling of 45-million tons, imposed by the government in 2017 to curb structural oversupply, carbon emissions and electricity demand in the notoriously power-hungry sector. Output in the first four months of the year rose 3.5% to 15.33-million tons.
Producers aren’t quite thumbing their noses at the cap, but they are pushing plants to their limits to rake in as much profit as they can, said Chen, who estimated that technological upgrades can allow smelters to run about 3% above nameplate capacity.