Coal trip takeaways; China’s aluminium outperformance Macquarie Research,

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Coal trip takeaways; China’s
aluminium outperformance
 This week we cover takeaways from our recent to trip to Shanxi to talk to
thermal and coking coal miners, and we look at how a sharp drawdown in
Chinese aluminium inventories has led to Chinese prices outperforming LME
prices over the last month.
Labour driving coal cost inflation
 The thermal coal mines we spoke to reported operating costs rising, on
average, by around 13% YoY. The biggest driver was labour, which was up
20% YoY. This was disproportionately affecting SOE mines, given their
tendency to overemploy. We saw an SOE with output of 1.2mtpa that was
employing 4,000 people. This compares with 650 employees at a private mine
with the same output.
Capacity utilisation still has room to ramp up
 Production at coking coal mines, particularly in the Linfen and Lvliang areas of
west of Shanxi (a region rich in hard coking coal), was being artificially
suppressed. One of the mines we saw had a capacity of 2mtpa, but the
government had set its 2011 production target at 1.2mtpa. We heard that
Shanxi produced 300mt of unwashed coking coal in 2010 and that it has the
potential to lift output by 100mt over the next five years. Given that production
is being suppressed the most in west Shanxi, the majority of the 100mt rampup
could be in hard coking coal.
Chinese aluminium prices have outperformed LME
 The LME aluminium price has underperformed its peers over the past month;
indeed, it is the only one of the major metals traded on the exchange to have
fallen in price over that timeframe. Chinese aluminium prices, by contrast,
have continued to increase, while stocks have been drawn down, reflecting
solid demand in the domestic market.
Order intake slowing, but low inventory will support prices
 Aluminium semis producers are now starting to see some softness in order
intake, although it should also be acknowledged that this is seasonally typical
and fabricators are generally reported to be holding low stock levels.
 On balance, it appears unlikely that the SHFE aluminium price will continue to
run away from the LME price in the coming months, but at the same time, the
world market balance as a whole appears to be sufficient to maintain price
levels through the second half of this year.