London, 20 July 2010

Last week's release of metal production data for June, by the Chinese National Bureau of Statistics in many cases went against expectations, with levels generally being at or above May levels. The one exception being zinc, where we believe Chinese domestic producers have struggled rising costs, squeezed treatment and refining charges, and seasonally slower demand – Societe Generale. There has been much speculation in recent months that Chinese aluminium production cuts would be increasingly apparent given power tariff hikes announced in recent months. Indeed, in June Henan province announced that 700,000 tpy of smelter capacity would be closed due to low aluminium prices and rising production costs.

Though cuts may well be occurring in Henan in particular, new projects are steadily being commissioned elsewhere, most notably in Northwest China, where there is great access to coal and cheap energy supplies. Last weeks release of June production data showed primary aluminium output levels were almost unchanged from the record levels seen in May, at around 1.41 million tonnes.

So, as of yet, cut backs are not seemingly impacting overall production levels. We still project that Chinese primary aluminium production for 2010 as a whole will be around 17 million tonnes, pointing to a domestic market in significant surplus, as new capacity additions outweigh closure of older plants.

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David Wilson, www.sgresearch.com

Base Metals Drivers: Few signs of Chinese production cuts in June