The outbreak and subsequent spread of the coronavirus is fuelling uncertainty in the aluminium market. The LME price has already hit a two year low of US$1687/t in early February. As a result, the market remains wary of weaker economic activity and demand growth, logistical backlogs and the impact on output across the value chain.

Even before the virus outbreak, our base case outlook for the metal was already showing a market moving into surplus, with all the risks pointing to a much larger oversupply position. For the time being, there are many permutations as to the outcomes from the coronavirus outbreak. Indeed, at the time of writing official data for the Chinese economy for February was yet to be released and we suspect that the government will announce delays to its publication (it has already delayed the release of trade data for January).

What is clear is that China’s economy and its aluminium sector command a far greater share of the global totals. Any significant dislocation in China will have far reaching reverberations across regional markets and potentially over an extended time-frame.

Downstream aluminium output takes an immediate hit; semis exports to follow?

The timing of the outbreak could not have come at a worse time in terms of deciphering the impact on demand. The seasonal post-new year bounce back in demand will almost certainly be delayed. Unlike primary smelters or alumina refineries, most semis plants were either shut for the holidays or were operating reduced shift patterns.

Several downstream facilities are in zones that have been locked down while others will not have restarted post the New Year holidays. We believe that the plants that rely on ingots or billets produced at smelters some distance away are now struggling to secure adequate supplies of metal. However, semis plants that purchase in-situ liquid metal – around 12.4 Mt in 2019 – are unlikely to be affected.

If downstream output does not recover soon then we would expect semis exports to fall rapidly through to March. This should support the LME price over the next few months except that the SHFE price is also likely to stay at a low level, leaving the arbitrage between the two exchanges to continue to incentivise semis exports.

Given that most downstream facilities typically operate at no more than 50-65% utilisation, there is enough ‘give’ to raise operating rates higher once the virus outbreak has been contained. In effect, the impact on demand in China for the year may not be as significant as the numbers may suggest over the short-term if the epidemic is contained.

Logistic bottlenecks trigger alumina cuts.

The coronavirus outbreak has disrupted the delivery of raw materials to alumina refineries, especially in Shanxi and Henan provinces. These two provinces account for 41 percent of alumina refining capacity in China and supply to the smelting hub in the Northwest. At the time of writing, refineries in Shanxi province were reported to have 10-20 days of bauxite stock compared with 1-2 months.

Meanwhile, refineries in Henan province with captive mines are operating as usual but those using third-party or imported bauxite are struggling to secure the required tonnages to maintain normal operations. We note that imported port stocks of bauxite have increased in the year-to-date by approximately 5 Mt.

Apart from bauxite, refineries are also short of caustic soda supplies. We understand that some caustic plants have suspended production, thereby resulting in a shortage. Coal gas is also in short supply forcing a few refineries to switch to natural gas, which has increased costs. We now estimate the Chinese domestic alumina market to be in a deficit of 1.1 Mt in Q1 2020.

Stranded alumina stock inland...

Refineries that are operating, as usual, are unable to truck alumina to smelters due to transport restrictions. Smelters in Xinjiang and Inner Mongolia that are further inland are the most impacted. The delivered alumina price in North China has risen from RMB2,420/t to RMB2,500/t since the end of January, whilst the delivered price to Xinjiang smelters is even higher. Some smelters in the province are operating with low levels of alumina stock. However, smelters in Xinjiang are low cost and therefore, better placed to pay above market rates for alumina.

… Increases the demand for imported alumina.

Smelters in East Inner Mongolia can receive alumina from the Bayuquan port but smelters in the west of the province have insufficient alumina stock. These smelters must secure timely supplies from refineries in either Shanxi or Henan to avoid production cuts. There is an increased interest in imported alumina as this can be railed from the port whereas intra-province truck delivery is severely constrained. We estimate that China imported 400 kt of alumina in January and is on track to import similar or higher tonnages in February.

What is the risk of aluminium production cuts?

Smelters in Guangxi and Guizhou have indicated that they are operating as usual but there are concerns around the timely shipment of anodes. Pitch, which is used in anode production, is also facing logistic bottlenecks. The shortage is so acute that even smelters with captive carbon plants in Shandong and Shaanxi are purchasing anode blocks as they are cannot produce anodes. Most of the smelters we contacted were comfortable with anode supplies but worried about cuts if the transport restrictions stayed in place for another week.

In the span of 12 days refining cuts in China have reached 5.2 Mt (annualised), representing 7% of the country’s estimated production. So far there hasn’t been a noticeable dip in smelter production rates. In the past few days, smelters have relied on port stocks and inventories at the smelter site. But if smelters cannot receive timely alumina shipments on an on-going basis, there is a risk that some might have to curtail output temporarily.