Falling aluminium prices have squeezed producers' margins in recent months, but this has not slowed the pace of aluminium production in China because of surging overseas demand and the high cost of shutting down production.

China is the world's largest producer of aluminium. Chinese aluminium supply remains strong and will put pressure on domestic prices in the short term until domestic demand improves. Higher Chinese production will also help to fill the supply gap overseas. In particular, it will meet demand from Europe and the US. Domestic research firm Antaike forecasts Chinese aluminium production to reach 10.42 million tonnes in the third quarter and 10.54 million tonnes in the fourth quarter, up from 10.11 million tonnes in the second quarter. The agency expects domestic demand to pick up towards the end of the third quarter, before easing in the fourth quarter.

Production profits turn negative due to falling aluminium prices

August aluminium futures on the Shanghai Futures Exchange fell to 17,300 yuan per tonne on 15 July, the lowest point since April 2021. Traders believe it is difficult to say where the bottom is, with cost a factor, but more so the supply/demand balance as well as the macroeconomic situation. Data from Macquarie Bank shows that the plunge in aluminium prices has led to production margins falling to a negative 650 yuan per tonne from 5,500 yuan per tonne in March. CRU Group estimates that around half of China's aluminium smelting production is losing money when the Shanghai aluminium futures price sits at 17,225 yuan per tonne in the second quarter of 2022, based on the Chinese cost curve. The August aluminium futures contract in Shanghai traded at RMB18,090 per tonne on Wednesday.

Production will continue even at a loss

Market participants generally agree that producers are unlikely to cut or stop production even if it is currently unprofitable. With electricity deregulation and many producers just returning to the market, sources said, manufacturers would not easily stop production given the huge costs of idling furnaces and restarting them; this, coupled with good profits last year, could help maintain production, even in the current unprofitable environment. analysts at CRU Group said smelters were still expected to increase production or release new capacity, following profits last year and in the first quarter of this year . China's deregulation of electricity in energy-intensive sectors this year, with increased production in Yunnan and Gansu, for example, and new capacity coming on stream, could help support a gradual increase in aluminium supply.

Tight supply and strong demand overseas

Abroad, particularly in Europe, aluminium smelting production, a major energy consumer, has been reduced due to soaring energy prices such as electricity and natural gas. This has helped encourage China to expand exports to fill the supply gap in Europe. China's exports of unforged aluminium and aluminium products jumped 34 per cent year-on-year to 3,509,079 tonnes in the first half of 2022, customs data showed. Wilkes, head of research at Suchedon Financial, said European supplies are very tight, the US is also relatively tight and energy issues will support aluminium prices until the first quarter of 2023. He expects LME aluminium prices to be between US$2,300 and US$2,600 per tonne from July to September.