OVERCAPACITY in China’s beleaguered aluminum market will persist in the coming months, weighing on local prices and boosting the appeal of shipping aluminum products overseas, traders and analysts said.

    Increased product exports will help plug a supply deficit in the West, but will also fuel competition with Western producers. Exports from the world’s No.1 aluminum miner are already dragging on premiums — the cost of obtaining physical metal — in Asia.

    “We certainly expect low Chinese prices to continue,” said Paul Adkins, managing director of Beijing-based consultancy AZ-China.

    “What drives the Chinese aluminum industry is not market economics but debt. And for as long as you need to service debt, you’ll keep the plant running.”

    Overcapacity has ballooned as local governments subsidize power costs for aluminum producers that are significant contributors to GDP.

    AZ China estimates that more than half China’s capacity is currently operating at a loss, even after the subsidies. It sees a domestic surplus of around 1-1.3 million tons this year.

    ShFE aluminum prices have hit a string of record lows already in January, falling to 12,685 yuan (US$2,045) a ton Tuesday, the lowest since 2005, and down more than 16 percent from mid-September.

    Meanwhile, China’s exports of aluminum products grew about 19 percent last year, a trend analysts expect to continue in 2015, given low local prices compared to international markets.

    China’s exports of unwrought aluminum and aluminum products jumped 38 percent in December to 540,000 tons from 390,000 tons in November, data showed.

    Primary aluminum attracts a 15 percent export tax in China, effectively shutting down exports, although semi-manufactured products such as rolled products receive a 13 percent rebate, helping make value-added exports profitable.

    Aluminum shaped as continuous cast coils can be remelted at destination, effectively becoming a substitute for primary material, noted Bank of America Merrill Lynch.

    “We estimate that China’s token semi exports (i.e. semis that are being remelted) could reduce this year’s 1 million ton market deficit in World ex-China by up to 450,000 tons,” the bank said.

    A trader in Singapore said that some Indonesian buyers were importing Chinese coils and plates. He added that Asian markets were well supplied and regional premiums were likely to fall.

    Low prices will encourage some Chinese facilities to close, however. China consultancy Antaike estimates close to 400,000 tons of aluminum production have been curbed since the end of last year. (SD-Agencies)