1. Nonferrous Metal Team of Research Department
Investment Consultation Qualification:
CSRC 2012 No. 669
Supply-side Reform & Sino-US Trade Conflict and Chinese Aluminum Market
Xu Yongqi
Nonferrous Metal Team of Research Department
May 2018
Qualification No.: F
Investment Consultation No.: Z

2. Highlights for Q2 Our views Evolvement of Russia sanctions
Aluminum: Oversupply softened; Aluminum prices to trend upward in Q2; Focus on captive power plants reform and trade war between the US and China
Main point:
Consumption improved during the busy season and primary aluminum capacities were launched slowly, softening oversupply. Russia sanctions aggravated supply shortage on the overseas market. Thus aluminum prices are expected to move up.
Highlights for Q2
Our views
Evolvement of Russia sanctions
Launch of Chinese primary aluminum capacity
Inventory decrease
Captive power plants rectification
Russia sanctions would result in supply shortage of alumina and primary aluminum on the overseas market
Prices hold above RMB15,000/t (USD2,374/t) for long would stimulate more primary aluminum capacities to be launched
The rectification tends to be stricter

3. Main points
Overseas alumina supply is tight while Chinese alumina supply mainly depends on profit.
The favorable economic data in Q1 offered FED the chance to raise interest for the first time in 2018 on the meeting in March, after that, prices for precious metal rose again.
Before the interest negotiation meeting in May, there would be no interest hike; but the market might keep the strong movement.
The meeting in May and speech of FED officers afterwards may impose certain pressure on precious metals prices. If the FED raises interest again in June, the pressure would be heavier, and the prices would have a great potential to retreat. Then the uncertainness of interest hike in September might bring about another round of discussion.
In Q2, prices for precious metals would fluctuate in a wide range with those for gold and silver hovering at USD1,250-1,450/oz and USD /oz respectively.

4. I. Raw Materials
1.1 Overseas alumina prices surge and Chinese alumina prices rise
Surging overseas alumina prices pulled up Chinese alumina prices. According to data from SMM, by late 13 April, the FOB price for Australia imported alumina has been up to USD550/t, up by 54.1% during the past one and a half months.
Chinese alumina prices became stable and trend upward; the future prices are noteworthy.
Guiyang
Data source: Wind CITIC Futures Research Dept. 2

5. I. Raw Materials
1.2 Norsk Hydro's production cut may result in supply shortage of overseas alumina
Norsk Hydro's alumina refinery Alunorte, with outputs of 5.8 million tons, was ordered to cut production by 50 percent in February.
Alongside with Russia sanctions, alumina on the overseas market might be in short supply. The outputs for overseas alumina increased by 1.44% to million tons in 2017 attributable to the production resumption of Alpart alumina plant in Jamaica. New overseas alumina capacities in 2018 are not too much; moreover, the 2 million tons from Emirates Aluminum and 1.5 million tons from Indian Anrak Aluminum would come on stream till late this year. The output increase in 2018 would be less than that in 2017.
China's imports of alumina decreased sharply YOY.
Data source: Wind CITIC Futures Research Dept. 2

6. I. Raw Materials 1.3 Chinese alumina capacity abundant
Chinese alumina capacity is abundant; the supply increase would be determined based on industrial profit and policy. In winter, 4.46 million tons of alumina capacity was restricted; while the new alumina capacity in 2018 is about 4.9 million tons.
New alumina capacity prediction in 2018 (10kt)
Company
Capacity Q1 Q2 Q3 Q4
Progress
Xinfa Chemical
100
Possible in Q2
Guizhou GAluminum 60
Little possibility for capital and policy issues
Huaqing Aluminum 40
Launched in Q1, saw products in March
Fusheng Aluminum 90
Under preliminary design
Jinzhong Chemical
Capacity enhancement for support
SPIC Zuiyi
Planned in Oct, for further evaluation
Total
490
250 2
Data source: Wind CITIC Futures Research Dept.

7. I. Raw Materials
1.4 Aluminum fluoride and prebaked anode supply improves
The environmental protection policy in 2017 caused tight supply of aluminum fluoride and prebaked anode, but the situation would improve in The downstream cost would provide a strong support.
Data source: Wind CITIC Futures Research Dept.

8. I. Raw Materials 1.5 Aluminum scrap
Aluminum scrap policy is to be reevaluated. China's imports of aluminum scrap account for about 5% of primary aluminum production and those from the US account for 30%. If China forbids importing the material from the US, China would see a decrease of about 400,000t in outputs. The stricter policy on aluminum scrap imports would have a significant impact on supply.
10kt
Imports
US imports
Ratio
Data source: Wind CITIC Futures Research Dept. 2

9. II. Primary Aluminum but Russia sanctions to affect overseas supply
2.1 Overseas primary aluminum supply edges up
but Russia sanctions to affect overseas supply
Overseas primary aluminum supply edged up. The output of overseas primary aluminum maintained an increasing range of about 1%, which was relatively stable. In 2017, overseas primary aluminum outputs were about 27.5 million tons. In 2018, the new capacities are not much, including about 720,000t from Russia, Vietnam and Alcoa with the actual increasing volume of about 350,000t. Besides, Hindalco would add about 300,000t capacity. However, the Russia sanctions would impact the overseas primary aluminum supply.
Project
Country
New and resumed capacity
Date
Rusal-BEMO Project II
Russia 15
H2 2018
Tran Hong Quan-Stage2
Vietnam
2018
Warrick Refinery
USA 16
Q2 2018
Aloca Wenatchee aluminum plant
Late 2017
New Madrid aluminum plant 10
Mid-2018
Data source: Wind CITIC Futures Research Dept.

10. II. Primary Aluminum
2.2 Overseas consumption trends stable but supply tight
Overseas consumption increased quickly. The consumption from March to May is expected to be 7.67 million tons, up by 3.03%, higher than 2.92% from January to February.
The overseas consumption in 2018 is expected to be million tons, up by 2.5% YOY, a little higher than supply. The overseas supply and demand would be balanced with supply being slightly tight.
Data source: Wind CITIC Futures Research Dept.

11. II. Primary Aluminum 2.3 Overseas shadow inventory made explicit
The supply and demand on the overseas market is well, maintaining the performance of 2017 with stocks at the low level. The stage risk is about the shadow inventory is made explicit. EU
Data source: Wind CITIC Futures Research Dept.

12. II. Primary Aluminum 2.4 Primary aluminum capacity increases
Based on data from SMM, China produced 5.74 million tons of primary aluminum in January and February 2018, down by 2.37% YOY.
In March, the primary aluminum output in China was million tons, up by 23.0% YOY. The total output of the material in Q1 this year was million tons, up by 22.1% YOY. New capacity and resumed capacity were released together late last year, so supply of aluminum ingot increased noticeably.
By 6 April, Chinese running annual capacity of primary aluminum has exceeded 37 million tons. It is reported by SMM that Chinese primary aluminum capacity was stable in April and the total output is likely to reach million tons, up by 21.9% YOY.
Company
Running capacity
Reduced capacity
Total capacity
Production resumption condition
Shandong Xinfa
146 12
158
Undetermined
Yongdeng Aluminum
8.4
3.6
Resumed, to finish in one month
Wanji Aluminum 35 18 53
Resumed, to finish by late Jun
Zhongfu Industrial 32
14.1
46.1
Not resume for bad weather, hope to start with good sales
Yugang Longquan 42 60
Not resumed
Linfeng Aluminum & Electricity 17 8 25
Planned in late March but postponed
Jiaozuo Wanfang 30
11.5
Resumed in mid-Mar, to finish in Apr
Shanxi Zhaofeng Aluminum
15.6
6.9
22.5
Not resumed; waiting for better market
Data source: Wind CITIC Futures Research Dept.

13. II. Primary Aluminum
2.5 New primary aluminum capacities launched slowly
According to plans announced by companies, 2.08 million tons of capacities would be put into production from March to May; but 530,000t of them might be put off.
Region
Company
Designed annual capacity
Running capacity
Planned new capacity
Launching date
Quota
Note
Guangxi
Laibin Yinhai Aluminum 50 33 17 Q2
Guangxi Xinfa Aluminum 32 22 10
Early March
With quota
Finished in late April
Suyuan Aluminum 20 8 12
Late May
Acquired by Baise Mining; to be launched late May
Guangxi Baise Mining Aluminum
134 30
Late March
Launched 100,000t in late March
Hualei New Material 40 25 15
March
Waiting for the last power generation unit to operate normally
Inner Mongolia
Huayun New Material 83 65 18
Poor condition, may be postponed
Mengtai Coal Power
TBD
Looking for quota
Chuangyuan Metal 80
Commissioning
East Hope Guyang
Q2-Q3
400,000t
To be launched in June

14. II. Primary Aluminum
2.5 New primary aluminum capacities launched slowly
Region
Company
Designed annual capacity
Running capacity
Planned new capacity
Launching date
Quota
Note
Guizhou
Yuping Guangmao Aluminum 10
2018
Capacity replacement
Xingren Denggao Aluminum 50 30
March
With quota
Unclear
Xingren Denggao New Material
TBD
Looking for quota
May not be launched
Huaren New Material 45 5
Launched in March
Yunnan
Yunnan Aluminum Zhaotong Plant 70 35
April
May be postponed
Liaoning
Liaoning Zhongwang 90 43 46
TBD for environmental protection
Gansu
Zhongrui Aluminum phase I
Launched in April
Zhongrui Aluminum phase II
November
400,000t
Shanxi
Zhongrun Project
Without quota
Ningxia
SPIC Ningxia Energy Aluminum 99 93 6
Xinjiang
East Hope
160 80 3
Qiya Aluminum & Electricity
115
May

15. II. Primary Aluminum 2.6 Inventory to decrease
Aluminum are mainly used for the real estate (30%), autos and exports. The end consumption weakened but may rebound from Mar to May.
Real estate: With the mortgage rate increasing, sales area of real estates narrowed from Jan to Feb, which would affect demand for aluminum products.
Autos: With the preferential tax cancelled, auto sales declined by 2.97% YOY from Jan to Feb, so the increasing range would be lower than 3.8% in 2017.
Optimistic expectation: From Mar to May, the consumption would reach 9.5 million tons and supply would be 9.25 million tons with stocks to decrease by about 250,000t. Inventory would still be large, but much are affected by the capital cost and monthly discrepancy
Data source: Wind CITIC Futures Research Dept.

16. III. Environmental Protection Policies and Trade War
3.1 Policies before 2017
Document
Date
Main content
Aluminum Industry Regulations
Jul 2013
Construction scale for alumina project must be over 800,000tpy;
New and upgraded primary aluminum projects must apply prebaked bathes of more than 400kA while current primary aluminum projects should be equipped with lines of more than 160kA;
Construction of carbon cathode and carbon anode for aluminum projects with capacity lower than 150,000tpy and 200,000tpy are forbidden;
AC consumption from new and upgraded primary aluminum liquid and ingot projects must be less than 12750kWH/t and 13200kWH/t respectively.
Guidance on Overcapacity from the State Council
(SC 2013 No. 41)
Oct 2013
New capacity construction must be forbidden; Illegal capacities should be cleared and rectified while outdated capacity should be eliminated.
Before late 2015, bathes lower than 16000kA should be eliminated; For aluminum liquid projects with AC over 13700kwh/t or failed to reach standard in late 2015, the electricity cost should rise by 10%.
No preferential electricity prices are allowed in regions; Encourage capacities with no electricity price advantage to quit and transfer capacity to hydropower area.
Support primary aluminum companies to sign direct-electricity purchase agreement with power plants.
Data source: Wind CITIC Futures Research Dept.

17. III. Environmental Protection Policies and Trade War
3.1 Policies before 2017
Document
Date
Main content
Notice on Capacity Replacement for Industries with Overcapacity
(MIIT 2015 No. 127)
Apr 2015
The measures shall apply to industries with extreme overcapacity such as iron & steel, primary aluminum, cement, glass. Projects construction concerning with these industries should set up capacity replacement scheme and take replacement based on equivalent or decrement capacity; New or upgraded projects should replace capacity based on obsolete quota announced by MIIT or the government after Obsolete capacity which exceeds time limit could not be replaced while unapproved construction projects should replace obsolete capacity announced after 2011.
Notice on Illegal Capacity Elimination among Iron & Steel, Primary Aluminum and Shipping Industries
(NDRC 2015 No.1494)
Jun 2015
Illegal projects under construction which match relevant guidance and regulation should be filed on basis of capacity replacement; those don't match requirements should be shut down or closed; those without land procedures could not be constructed before completing procedures.
Illegal projects constructed which match requirements should be filed, while those don't match requirements should be filed after consumption adjustment.
Projects built before 2004 which were not included in the rectifying scope should be filed independently.
Guidance on Creating Favorable Market Environment to Promote Nonferrous Metal Industrial Restructure
(SC 2016 No.42)
Jun 2016
New (upgraded or expanded) primary aluminum projects with capacity utilization of more than 80% should make replacement plan and be published online;
New illegal primary aluminum projects shall be punished severely;
Primary aluminum companies with power plants should pay governmental fund and subsidiary as well as system standby fee.
Set up local power network in recycle renewable resources area on premise of adding no primary aluminum capacity.

18. III. Environmental Protection Policies and Trade War
3.2 Policies after 2017
Document
Date
Main content
Actions on Air Pollution Treatment in Beijing-Tianjin-Hebei and Surrounding Areas in 2017
(NEPA 2017 No. 29)
Feb 2017
Illegal projects built after May 2013 or failed to implement the document 2015 No should be halted of construction or production.
Special Actions on Rectifying Illegal Primary Aluminum Projects
(NDRC 2017 No. 656)
Apr 2017
Primary aluminum plants in 2+26 cities should limit production by more than 30% based on electrolytic bathes; alumina plants should limit production by about 30% based on production lines.
Carbon plants failed to reach emission standard should shut down; those reached standard should limit production by more than 50% based on production lines.
Actions on Air Pollution Comprehensive Treatment in Beijing-Tianjin-Hebei and Surrounding Areas during Autumn and Winter from 2017 to 2018
(NEPA 2017 No. 110)
Aug 2017
During the heat-supply period, primary aluminum plants should limit production by more than 30% based on electrolytic bathes while alumina plants should limit production by about 30% based on production lines. Carbon plants failed to reach emission standard should shut down; those reached standard should limit production by more than 50% based on production lines. Nonferrous recycle industry should cut production by 50% for the casting process.
Data source: Wind CITIC Futures Research Dept.

19. III. Environmental Protection Policies and Trade War
3.2 Policies after 2017
Document
Date
Main content
Notice on Capacity Replacement through Merge and Reorganization for Primary Aluminum Industry
(MIIT 2018 No. 12)
Jan 2018
Projects for aluminum liquid or ingot production including electrolytic process should obtain capacity replacement quota through merge or internal transfer to finish equivalent or decrement replacement.
Quota for replacement must accords to national policies and project approval requirements, and must be listed on the illegal projects rectification report in late Oct 2017.
Primary aluminum quota which were closed or published from 2011 to 2017 must be replaced before 31 Dec, 2018.
Special Actions on Standard Construction and Operation of Coal-Consumption Power Plants
(NDRC)
Late Mar 2018
Control new coal-consumption power plants construction and clear illegal plants. Since the issuing date of the Action, new coal-consumption power plants which are unapproved or unlisted shall be blamed, meanwhile all power projects in the region shall be denied.
Data source: Wind CITIC Futures Research Dept.

20. III. Environmental Protection Policies and Trade War
3.3 Trade war between the US and China
No.
Date
Main content 1
12 Jan, 2018
The USITC confirmed the damage for domestic aluminum industry caused by aluminum plate imports from China. 2
8 Mar, 2018
Announced to impose tariff of 25% and 10% on iron & steel and aluminum imported from China . 3
22 Mar, 2018
Based on 301 investigations, announced to impose high tariff against commodities imported from China, restrict Chinese investments in the US and take actions targeting China in WTO. The US would impose tariff on Chinese imports which value about USD60 billion. 4
6 Apr, 2018
The US Treasury announced to sanction Russian individuals and entities in order to crack down on Russian Malicious Intent. The list includes Oleg Djeripaska, a Russian tycoon and the shareholder of Rusal. 5
17 Apr, 2018
The US Treasury to impose an anti-subsidy tariff of 113% on aluminum plates imported from China.
Data source: Wind CITIC Futures Research Dept.

21. IV. Supply-Demand Balance Prediction
4.1 Alumina supply-demand balance
Prediction on Annual supply-demand balance for Chinese alumina (Unit: 10kt)
2016
2017(e)
2018(e)
Production
6069
7064
7308
Production increase rate
5.18%
16.39%
2.99
Net import
292
288
320
Supply
6361
7352
7595
Demand
6462
7307
7672
Demand increase rate
5.16%
13.08% 5%
Supply-demand balance
-101 45
-77
Data source: Wind Aladdiny SMM Antaike CITIC Futures Research Dept.

22. IV. Supply-Demand Balance Prediction
4.2 Primary aluminum supply-demand balance
Prediction on Annual supply-demand balance for Chinese primary aluminum(Unit: 10kt)
2016
2017(e)
2018(e)
Production
3252
3660
3860
Production increase rate
5.6%
12.50%
5.5%
New import
18.2 10 5
Supply
3270
3670
3865
Demand
3254
3550
3799
Demand increase rate
7.8%
9.10% 7%
Supply-demand balance 16
120 66
Data source: Wind Aladdiny SMM Antaike CITIC Futures Research Dept.

23. Thank you all ! 21