China Aluminum Stockpiles Seen at Two-Year High Amid Glut

Aluminum stockpiles in the main trading regions in China have climbed to the highest level in two years as growth in supply outpaces demand in the world’s largest user, according to two industry surveys.

Reserves in Shanghai, Wuxi and Hangzhou, and in Guangdong province gained to about 940,000 metric tons as of Oct. 22, the highest since September 2010, according to Wen Junxiang, head of the research department at Guangzhou KT Commodity Information & Consulting Co. Stockpiles more than doubled this year to about 1 million tons, the largest since July 2010, said Zhang Chenguang, an analyst at data provider SMM Information & Technology Co.

The estimates add to signs of a glut in the second-largest economy as new capacity, especially in the west, helps to boost output to the highest ever even as China’s manufacturing shrinks. Aluminum in London has dropped 13 percent over the past year, and Alcoa Inc., the largest U.S. producer, cut its forecast for global demand growth this month as China’s economy slowed.

“There is no improvement in demand this October,” SMM’s Zhang said in a phone interview on Oct. 23 in Shanghai. “As new capacities continue to be installed in the west, we expect inventories to climb further.”

Three-month metal on the London Metal Exchange, which touched a 34-month low of $1,827.25 a ton in August, was little changed at $1,939.25 at 5:47 p.m. in Shanghai. Barclays Plc said aluminum’s fundamentals “offer the most bearish outlook for all the base metals,” according to an Oct. 22 report from analysts Gayle Berry, Sijin Cheng and Nicholas Snowdon.

Capacity Reductions

The increased inventories may force smelters around the world to cut output further. Alcoa said in January it was reducing capacity 12 percent. Rio Tinto Group said in November it would close the Lynemouth smelter in the U.K. The lightweight metal is used to make autos and consumer appliances.

The survey results from both companies, which tally holdings in the three cities in the Yangtze River Delta as well as Guangdong province in the south, include metal monitored by the Shanghai Futures Exchange. Those holdings have more than doubled to 434,363 tons this year, the highest level since January 2011, according to Oct. 19 data from the bourse.

Aluminum stockpiles in China probably won’t decline in the next few months as demand “isn’t great,” Yang Xiaowu, a senior economist at Aluminum Corp. of China, said in an interview on Oct. 17. Inventories may be about 900,000 tons, he said.

LME Reserves

Reserves in LME-registered warehouses -- none of which is located in China -- have expanded 1.8 percent this year to 5.06 million tons, according to data from the bourse, with 13 percent held in Asia. The holdings reached a record 5.13 million tons in February. China accounted for 42 percent of global aluminum demand last year, according to Bloomberg Industries research.

Output in China climbed 11 percent to 14.77 million tons in the first nine months from a year ago, according to the National Bureau of Statistics, while CRU International Ltd. forecast demand growth may slow to 7.5 percent this year. Production in Xinjiang, a western region, was a record 104,282 tons in August, according to Beijing Antaike Information Development Co. That compares with 311,910 tons in Henan, the biggest producer.

The market balance shows an oversupply, both for this year as well as 2013 even as water, power sourcing and logistics may lead to slower-than-expected production growth in Xinjiang, Barclays said in the Oct. 22 report.

Manufacturing may have contracted for a 12th month in October, according to a preliminary reading of a purchasing managers’ index from HSBC Holdings Plc and Markit Economics. The gauge stood at 49.1, below the level of 50 that separates contraction from expansion. The economy grew 7.4 percent in the third quarter, the slowest pace since the first quarter of 2009.

‘Huge Stimulus’

“Unless there are huge stimulus policies coming after the party congress in November, inventories will rise to a new record,” said Wen at Guangzhou KT, a unit of KCTH Trading Co. The all-time high is 1.2 million tons, set in May 2010.

The Communist Party is set to begin a congress Nov. 8, part of a once-a-decade power handover. The government won’t provide large stimulus and a strong rebound in growth is unlikely, Song Guoqing, an adviser to the People’s Bank of China, said Oct. 18.

Global aluminum demand will climb by 6 percent this year, New York-based Alcoa said Oct. 9 in its third-quarter earnings statement. It said in July that usage would rise 7 percent, after increases of 10 percent in 2011 and 13 percent in 2010.

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