10 days ago, we posted a story about an imminent announcement regarding new restrictions on smelter construction. See here for that post.
The announcement came out yesterday. China’s Ministry of Industry and Information Technology (MIIT), together with other ministries including the NDRC, has published a notice on their website calling for curtailments across the board.
Our reaction to this announcement is unchanged from last week. We have no plans to slash wrists or declare an end to the world as we know it. Certainly we do not see any sudden change to our long-term views about import levels.
The announcement does not affect new smelters or expansions, if they have already moved from the drawing board to an engineering stage or later. Second, it is aimed at ensuring the new plants are a certain size and efficiency.
One needs to read the fine print. The relevant ministries are seeking to bring more balance to the industry. In the announcement, they quote capacity utilisation percentages as low as 70%, and low profit margins for the existing participants. It’s this that they are seeking to redress.
To gain a better understanding, let’s look at some of the bigger projects that are out there in the future. East Hope’s new smelter will not be affected, despite the fact that it’s long term design calls for total capacity of 3 million tonnes. Shenhuo’s new smelter in Xinjiang will not affected, and it will be 1.6 million tonnes.
By our analysis, some 19 projects will not be affected. Those projects have a total capacity of around 8 million tonnes.
Unfortunately for us, our more phlegmatic view isn’t the stuff of headlines. No doubt the more radical the reaction to this announcement, the more that the press will lap it up. But we would rather be accurate that sensational.