COLUMN-Repricing aluminium’s supply risks is a chaotic work in progress – by Andy Home (Reuters U.K. – August 14, 2017)

LONDON, Aug 14 (Reuters) – Aluminium was the standout performer among the major industrial metals last week. On the London Metal Exchange (LME) three-month metal jumped by more than 7 percent to reach its highest in nearly three years at $2,048 a tonne.

China outdid even that, with the most actively traded contract on the Shanghai Futures Exchange (ShFE) hitting a five-year high of 16,480 yuan a tonne amid an explosion in trading volumes and open interest. There is much speculative froth in these moves, particularly in Shanghai, but there is also a collective attempt to reassess this market’s supply risks.

China has embarked on a policy of closing “illegal” smelter capacity, meaning that which has been constructed without the full gamut of official approvals. This being China, the largest producer of aluminium in the world, there are big implications for supply.

One operator alone, China Hongqiao, confirmed this morning that it has closed 2.68 million tonnes of capacity, equivalent to 4.5 percent of global output last year. These are extraordinary times for aluminium. It is a metal with a history of structural excess capacity and oversupply. Crisis in the past has been defined by too much metal rather than too little.

Which means there is no obvious precedent for pricing this new supply-side uncertainty. Not helping is the uncertainty over what exactly is going on and the impact on actual production levels. When the world’s largest aluminium producer, Hongqiao, closes that much capacity, the news might be expected to be instantaneous and clear-cut.

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