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Column: Is China on the verge of reaching peak aluminum production following a record 2020 output?
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LONDON (Reuters) - The United Kingdom's prime minister has said that the country's economy is in a state of flux. During the past year, global aluminum production increased by 2.5% to a record 65.3 million tonnes, with producers increasing production rates as the aluminum price recovered from its March lows.

China has been at the forefront of the COVID-19 recovery, as the country's booming demand has caused the world's largest producer to become a net importer of primary metal this year.

China's massive aluminum smelting industry responded to rising domestic aluminum prices by increasing annualized production by 1.8 million tonnes in the second half of 2020, according to official figures.

According to the International Aluminium Institute, annualized run-rates exceeded 39.0 million tonnes for the first time ever in November, marking a historical high.

In conjunction with a slowing in demand ahead of the Chinese New Year holiday period, most analysts expect prices to fall in the coming weeks and months as the market adjusts to the increased supply of ethanol.

For many years, this has been the way the aluminum market has worked out. Despite China's seemingly limitless ability to add new capacity, it has proven to be the single most significant impediment to any sustained price rally.

Things, on the other hand, maybe changing, with even Chinese aluminum producers now predicting a peak in aluminum production.

CHINA'S CAPABILITIES ARE LIMITED
China may be running out of new capacity to flex as the country's production edge closer and closer to the country's capacity limit of 45 million tonnes per year, according to some estimates.

A strict old-for-new policy in the aluminium seamless industry has been in effect since 2017, according to the government. New smelters have only been permitted when existing capacity is depleted to match the new capacity.

In theoretical terms, there is six million tonnes of potential flex between the cap and the run-rate of 39 million tonnes in November. In reality, the disparity is much smaller than it appears on the surface.

According to the AZ China consultancy, there is currently approximately three million tonnes of shadow capacity that is sitting idle.

The Chinese government considers these smelters to be "illegal," primarily because they did not comply with all of the bureaucratic requirements of the permit application process.

As far as we are aware, no operators have been tempted to secretly energize their pots, according to an AZ China note to clients in September.

"However, it serves as a useful reminder that the theoretical maximum limit of 45 million tonnes cannot be reached under the current rules," says the author.

To be more specific, the "illegal" smelters lack the replacement capacity licenses that they require in order to begin operating their production lines.

Even if you take these operators out of the equation, Chinese aluminium tube production is much closer to reaching its capacity ceiling than it might appear at first glance.
THE POWER DISRUPTIONS IN CHINA
The Chinese government could, of course, grant permission for the "illegal" operators to begin operations. It may also be able to raise the capacity limit.

This is further complicated by the pledge made by Chinese President Xi Jinping last October that the country would reach its peak carbon emissions by 2030 and be completely carbon-neutral by 2060.

That represents a significant challenge for a sector that was 90% reliant on coal power to energize its potlines in 2018.

The conflict between the needs of the aluminium tubes market and the constraints imposed by China's carbon reduction goals is already beginning to show signs of emergence.

Last week, the country's two largest aluminum producers issued a joint call for the industry to reduce emissions, conserve energy, and produce low-carbon metal as part of the country's national plan to achieve carbon neutrality.

Although state champion Aluminum Corp of China and top private sector producer China Hongqiao Group may appear to be unlikely bedfellows, both companies have significant amounts of capacity in Yunnan province that is powered by hydroelectricity.

Both of them are speaking from a position of “green” power and authority.

That should not detract from the significance of their joint call for strict capacity and output controls, which should be implemented immediately.

However, the real bombshell is a recommendation that production and capacity of both primary aluminum and raw material alumina should reach their zenith during the Five-Year Plan period of 2021-25.

Although no specific targets were mentioned, this unusual public-private call to arms suggests that the political landscape of China's aluminum industry is shifting in some ways.

For a visual representation of China's output, the Gulf and North America were the only regions to see an increase in output last year:
 
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