Conclusion: Chinese data for April show China being a net exporter of aluminum, which is bearish for the price of aluminum and bullish, on the margin, for the Yuan.
As it relates to commodities, we watch Chinese supply and demand very closely as China is the key swing factor globally for many commodities. The April data for aluminum was particularly meaningful as China became a net exporter for the first time since late 2008.
China is currently the world’s largest producer and user of aluminum, so its influence on that market can be dramatic. As mentioned, for the first time since 2008, China exported more aluminum than it imported. Specifically, exports rose to 48,546 tons, which exceeded imports of 28,987 tons. This inflection of exports is not surprising, as Chinese aluminum productive capacity has expanded 20% this year, which has led to a massive building of aluminum stock piles in China. These stock piles are estimated to be at 489,495 tons, up ~61% year-to-date, based on data from the Shanghai Futures Exchange.
There is also a political implication to increased exports from China. In late April, the U.S. Commerce Department indicated they planned to investigate whether some Chinese aluminum products are getting unfair subsidies. The crux of the argument is that the artificially low price of the Yuan provides cheap manufacturer costs for aluminum and aluminum products within China, which provides a competitive advantage on the world stage. As the production of aluminum in China continues to exceed its internal demand, the potential for this to become a political issue will further increase and are likely supportive of an eventual revaluation of the Yuan.
While this data point is bearish for the price of aluminum and bullish, on the margin, for the Yuan, it is difficult to read much into the implications for China. Aluminum is the world’s second most produced metal, after iron, and is used in a myriad of end products, including: vehicle production, construction (windows, doors, siding, etc), household items, power lines, and electronics. Given the wide varied of end use, the Chinese government has ramped up its internal production of aluminum well ahead of even its normal use of aluminum. Thus, this inflection does not necessarily suggest a slowing of the end markets in China.
On the bullish side of the equation for aluminum price, last week China also indicated that it may raise power surcharges on some aluminum companies by as much as 100 percent in June, to curb this growing over capacity. To the extent this goes from rhetoric to policy, it will certainly slow production of aluminum in China, which will serve to draw down stock piles and put supply and demand back into balance.
Daryl G. Jones