Singapore 10/03/2016 - Some Chinese aluminium smelters are restarting idled capacity and commissioning new capacity after a rebound in domestic aluminium prices of more than 20 percent since late November.
But smelters are not rushing to so, remaining cautious while there remains uncertainty over future price direction, market participants said.
Capacity that has already been or is planned to be restarted alongside new start-ups over the past two months amount to around 500,000 tonnes per year, analysts estimate. Some of the restarts are said to be in Qinghai, Chongqing and Ningxia.
Industry watchers are watching for more restarts after domestic aluminium prices hit 11,500 yuan per tonne - a price level most deemed "reasonable" for smelters to resume operations.
After production cuts in the second half of last year, aluminium contracts on the Shanghai Futures Exchange have recovered from a dip to an all-time low of 9,555 yuan per tonne late in November.
The most active SHFE May contract finished at 11,315 yuan per tonne on Thursday, down 55 yuan on Wednesday's close, after hitting a near-five-month high of 11,635 yuan last Friday.
Other than improved aluminium prices, lower operating costs are also providing incentives for output resumption, with some smelters in Qinghai and Sichuan said to have secured power subsidies from the local government.
Some stoppages in the fourth quarter of last year were also due to high power rates in southern China – a hydropower-dependent region where electricity rates are high during winter and low during the rainy season in the summer, a Shanghai-based aluminium analyst said.
"High power rates are no longer a problem for smelters in the region with spring approaching," she said.
Although some smelters have restarted production, most are proceeding cautiously while there is uncertainty over whether aluminium prices could climb to 12,000 yuan per tonne or even hold at the 11,500-yuan level, sources said.
If prices move above 12,000 yuan, another one million tonnes per year of capacity could restart, a Shandong-based metals analyst estimated.
But most industry participants do not see domestic prices hitting 12,000 yuan any time soon and, even if they do, they would probably fall again quickly - gains are being checked by new start-ups, production restarts and slow demand, they said.
China will add three million tonnes per year of newly built aluminium smelting capacity in 2016, the China Nonferrous Metals Industry Association (CNIA) estimated late last year. These will mainly come from the Shandong, Inner Mongolia and Guangxi regions.
The breakeven levels for much of the planned new capacity are around 11,000 yuan per tonne, according to market participants. There is new capacity starting up in Xinjiang as well, they noted.
"The incentive to commission new capacity and restart idled capacity is probably not huge at 11,000 yuan per tonne," the Shandong analyst said.
Prices will need to be able to hold at 11,500 yuan per tonne at least for at least a month or two before there any meaningful restarts, he claimed.
The Shanghai analyst sees resistance for aluminium prices at 11,600 yuan while a Beijing-based metals analyst reckoned 12,000 yuan is the highest level domestic aluminium prices can reach this year.
"At 11,500 yuan per tonne, we are already advising futures clients not to go long any more," the latter added.
Still, support for domestic aluminium prices is probably around 11,000 yuan per tonne following the massive production stoppages last year, analysts said. Almost five million tonnes per year of Chinese aluminium capacity were halted in 2015, CNIA estimates.
(Editing by Mark Shaw)