BackChina consolidation could trim metal oversupply
Incremental capacity addition is expected to be slower as most companies are adjusting their capital expenditure spends
Premium
Could this be for real? China is planning a reshuffle of state-owned industrial assets, according to the Financial Times. The next logical step will be to shutter unviable units of their consolidated operations. If that happens, China will be doing the metals industry a big favour in the long run.
The newspaper report says State Power Investment Corp. may transfer its loss-making aluminium smelters to Aluminium Corp. of China (Chinalco), adding 2.7 million tonnes (mt) to its existing smelting capacity of 3.7 mt. That is just moving things around and not tackling the real problem of oversupply and propping up of inefficient units. It will only see Chinalco become the largest aluminium producer, ahead of Alcoa Inc. and Rusal Plc. The real restructuring will be when Chinalco puts its loss-making smelters on notice.
This restructuring is not restricted to Chinalco. News reports have mentioned similar moves in energy, steel and property.
The global metals industry could see structural shifts if this happens. The industry is in a difficult position. Capacity additions are worsening the problem created by weak demand. Jittery financial markets are further accelerating the fall in those metals that are the underlying for financial contracts. If prices continue to fall and demand does not bounce back, firms have no choice but to cut output. Standard Chartered Bank Plc analysts expect industrial metals to stagnate for six months, and the bank has cut its outlook across base metals, lowering its copper price forecast in the fourth quarter by 28% and for aluminium by 24%, according to a Bloomberg report. Companies, too, are getting worried. BHP Billiton Ltd now expects China’s crude steel production to grow more slowly.
Incremental capacity addition is expected to be slower as most companies are adjusting their capital expenditure spends. Projects that lower production costs or improve productivity are getting preference over plain capacity additions. A strong floor to stop falling prices can come either from a revival in demand or better sentiment, but the prospects for either don’t seem bright. Shuttering less profitable capacity, at least till the market stabilizes, will cut supply and restore balance.
If China nudges loss-making production out, it will make a significant difference. The state has provided life support to keep these units functioning. Companies have begun to do their bit. Russia’s Rusal Plc said it is considering reducing capacity by 200,000 tonnes in the next 12 months. In India, Vedanta Ltd said it is considering curtailing aluminium production. A 2.6% cut in India’s finished steel production in July, despite having higher capacity, indicates restraint.
To be sure, the urgency to cut capacity is not in evidence globally. Many large producers are holding on to hope that China’s economic growth will be higher in the second half of 2015. In the medium to longer term, they expect it to successfully revive consumption demand, which will then lead to a consumption-led revival for industrial metals.
Whether that bet will prove to be a winner only time can tell. If the recent economic numbers out of China become a trend, then the odds are against them.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
