Global primary aluminum production hit a record high in August, with annual global smelter output reaching 71.2 million tonnes.

This is the second consecutive month that the run rate has exceeded the 70 million ton mark. prior to July, the level had only been breached once in 2022, in August.

The International Aluminum Institute (IAI) has made some significant changes to its primary production data in its latest monthly update, improving its previous assessment of production in China and the rest of the world.

It is now clear that China, the world's largest producer, is experiencing a surge in production as power supplies improve in parts of the country's hydroelectric system previously affected by drought.

Marking Higher

Non-Chinese aluminum production has been higher than previously expected.

IAI raised its estimate from the beginning of last year, adding about 577,000 tons of annualized production to its "not reported" category.

Much of the increase is attributable to previously unaccounted for production from Malaysia and Iran, neither of which reports production data directly to the Institute.

China's production for the first half of the year was also revised upward significantly.

IAI previously projected an annualized decline of 118,000 tons in Chinese production for the first seven months of 2023. The country's production is now expected to increase by 1.3 million tons.

Global production in August was 6 million tons, up 1.6% from August last year, and cumulative production was 46.5 million tons, up 1.7% from a year ago.

China's economy grew 2.5% between January and August, while the rest of the world lagged behind with more modest growth of 0.5%.

Close to the limit?

China's primary metal production fell in the first three months of 2023 due to power restrictions in hydropower provinces such as Yunnan and Sichuan.

However, the country's energy-intensive smelters are now benefiting from improved power supply due to the rainy season in the southern provinces.

China's annualized starts have risen by 2.1 million tonnes since March and hit a record high of 42.4 million tonnes in August.

Production is now approaching the 45 million ton level, which marks the capacity cap set for the industry a few years ago.

It is unclear how vigorously this cap is being enforced. If China's power generation problem rears its ugly head, it may not be adequately tested.

It all depends on rainfall in Yunnan, a major aluminum production center due to its "green", low-carbon credentials.

Demand Strength

Chinese consumers appear to be absorbing the extra metal being produced.

Physical stocks registered at the Shanghai Futures Exchange (ShFE) have not increased. In fact, exchange inventories are currently at an all-time low of 90,293 tons. This time last year, 210,000 tons of aluminum were stored in Shanghai Futures Exchange warehouses.

As imports of primary unwrought metal have increased, so has domestic supply. Imports in the first seven months were 602,000 tons, more than double the amount imported at this time last year.

At least so far, the increase in exports of semi-finished products has not yet been subject to spillover effects, which in the past have been the result of surpluses in the domestic market. Exports of primary, alloyed and finished aluminum fell by 20% in the first half of the year.

By inference, Chinese offtake has been surprisingly strong given the apparent weakness in the real estate sector and broader manufacturing.

Energy transition sectors such as electric vehicles and transmission lines may have been strong enough to offset subdued activity in other parts of the downstream user base.

However, the strength of Chinese aluminum demand will be tested as domestic production remains on the rise and positive import arbitrage on the London Metal Exchange suggests more inflows in the coming months.