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China’s dual strategy to cut hidden debt, boost fiscal health

The Chinese government’s new approach, announced on November 7, will allow regional authorities to refinance their debt through a mix of special local bonds and swaps over the next five years.

The objective is to significantly reduce the so-called “hidden debt,” a category of debt that often escapes transparent reporting and is linked to risky financing platforms backed by regional governments.

At the end of 2023, this hidden debt had reached a staggering 14.3 trillion yuan (US$1.99 trillion). By 2028, authorities hope to bring it down to a more manageable 2.3 trillion yuan (US$320 billion).

The debt relief measures involve two primary components: an expansion of local government special bonds and a debt swap program. Over the next three years, local governments will be allowed to borrow up to 6 trillion yuan (US$838 billion), with a focus on replacing the hidden debt with more transparent financial instruments.

Additionally, a 4 trillion yuan (US$558 billion) quota will be set aside to facilitate these swaps through annual bond issuance, totaling 800 billion yuan per year from 2024 to 2028.

The package, while substantial, has received mixed reactions from market analysts.

Some see the plan as a critical step toward restoring fiscal balance and improving economic stability, while others argue that it falls short of the more direct economic stimulus many had hoped for.

Mark Williams, chief Asia economist at Capital Economics, noted that while the refinancing plan will reduce interest costs and free up resources for other spending, the overall impact on China’s economic growth is likely to be minimal.

Williams told CNN that at best, the package amounts to around 0.5 percent of GDP spread over five years, pointing out that the debt relief measures alone are not enough to significantly stimulate the economy.

The move comes at a time when China is grappling with various economic challenges, including a sluggish recovery from the COVID-19 pandemic, weak consumer demand and persistent problems in the real estate sector.

Many local governments, which heavily rely on land sales for revenue, have been hit hard by the ongoing real estate slump, leading to a drastic decline in their financial capabilities. As a result, some cities are finding it difficult to provide basic public services, and the risk of defaulting on debt payments is rising.

China’s overall fiscal situation is a key concern for policymakers, with total government debt reaching approximately 85 trillion yuan (US$11.5 trillion), or 67.5 percent of GDP.

While the country still has room to take on additional debt, the growing fiscal deficit could pose risks in the long term.

China’s package won’t help copper demand

Despite the size of China’s debt relief package, copper market participants don’t see it stoking demand.

Industry leaders have argued that while this massive financial intervention could prevent defaults and improve fiscal health, it stops short of the direct economic stimulus needed to revive copper consumption.

Bloomberg quotes Ni Hongyan, vice general manager of Eagle Metal International, one of China’s top importers of refined copper, who expressed skepticism about the package’s potential impact on physical copper demand.

‘The latest stimulus is to refinance local government debts, so that’s not going to boost physical demand much,” he said.

At the same time, the Chinese copper market, long anchored by annual supply contracts with global producers, is undergoing a fundamental shift as importers increasingly turn to spot market purchases.

For 2025, China’s copper buyers plan to continue taking less tonnage through annual contracts, including from Chile’s copper giant Codelco. This shift reflects the current uncertainty in China’s demand for copper, which is facing its weakest growth in decades amid mounting domestic capacity and economic slowdown.

‘Many of our clients and peers lost big money this year from the terms they signed. No one believes the spot premium will increase a lot for the next year,” Hongyan added in a separate interview

Since late September, China has introduced several initiatives aimed at instilling market confidence, yet copper prices have slumped by nearly 10 percent. According to Citigroup (NYSE:C), which recently lowered its copper price forecast, these measures fall short of addressing the demand-side weakness in China’s copper market.

Analysts have noted that the potential return of US tariffs under Donald Trump’s re-election could add further pressure to copper demand by stifling Chinese exports. Meanwhile, the structural challenges within China’s copper industry complicate the situation further. The country’s heavy investment in copper smelting capacity over recent years have led to oversupply, crowding out imports and intensifying competition in the global market.

Collectively, the sentiment seems to be clear: without more assertive fiscal stimulus from China, the nation’s copper demand might fail to reach levels critical to supporting prices.

Despite the focus on debt relief, many analysts expect China to eventually introduce more fiscal and monetary measures to support the economy. In late September, President Xi Jinping called for further fiscal and monetary support to bolster economic activity, including measures aimed at stabilizing the real estate market.

Since then, some steps have been taken, including interest rate cuts and reductions in the reserve requirement ratio, but these measures have yet to yield significant results in terms of economic growth.

China’s economic growth has been under pressure for some time, with the country’s GDP expanding by just 4.6 percent in the third quarter of 2024, slightly above analysts’ expectations, but still below the target of around 5 percent.

While the government continues to push for a recovery, the road ahead remains uncertain. The scale of the debt relief package, while significant, is unlikely to provide a quick fix for China’s broader economic challenges.

More crucially, with Trump set to return, investors brace are bracing for trade tensions to reach a fever pitch.

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LFP batteries dominate as cobalt-rich chemistries decline

According to S&P Global, during the third quarter, the market share for NMC batteries stood at 24.6 percent, while competing chemistry LFP dominated with a 75.2 percent share of the market.

Unlike platinum and palladium, where substitution is relatively common as prices fluctuate, the firm believes the focus on cobalt-free battery chemistries will likely prevail. That’s because they “are preferred for their safety, longer lifespan, and lower costs, and have gained traction, especially in China, in recent years.”

Rising plug-in hybrid electric vehicle (PHEV) production and sales are also causing shifts in demand, as PHEVs require smaller batteries than fully battery electric vehicles.

Now industry participants are starting to realize the sobering reality that cobalt may be phased out completely.

This possibility has been affirmed in correspondence between Bloomberg and China’s CMOC (OTC Pink:CMCLF,SHA:603993), the world’s largest cobalt-mining company.

“We predict that EV batteries will never return to the era that relies on cobalt,” said Zhou Xing, a spokesperson for CMOC. “Cobalt is far less important than imagined.”

Other segments supporting cobalt demand

Despite its shrinking market share in the auto sector, cobalt demand from the consumer electronics segment remains steady, largely driven by lithium-cobalt-oxide batteries that are approximately 55 percent cobalt.

Citing data from China’s Ministry of Industry and Information Technology and China Customs, S&P Global notes that in July and August, China’s mobile phone production rose 9.3 percent year-on-year, while exports grew 4.8 percent.

Cobalt demand will also be propped up by its use in superalloys, a niche that is expected to quadruple its cobalt demand by 2050, reaching 55,000 metric tons due to increased military, aerospace and satellite applications.

However, support from consumer electronics and superalloys likely won’t be enough to absorb current oversupply.

“The cobalt market is currently expected to be in surplus through 2028, with the surplus peaking at 27,000 metric tons in 2024 and gradually decreasing to 3,000 metric tons by 2028,’ said Alice Yu, principal analyst at S&P Global.

What is aluminum?

Aluminum is a silvery-white metal that is highly malleable, corrosion resistant and thermally conductive, as well as lightweight. On the periodic table, aluminum’s chemical symbol is Al. It may be the most abundant metal in the Earth’s crust; however, it rarely exists on its own naturally. More typically, it is found in aluminum silicates, which refers to minerals such as bauxite and cryolite.

Bauxite mines are a large source of the world’s aluminum production. The bauxite is processed to obtain aluminum oxide, known as alumina. A colorless crystalline substance, alumina is sometimes used as a raw material in the ceramics and chemical processing industries. Its major use is as a starting material in smelters for the production of aluminum.

What is aluminum used for?

Aluminum has a wide range of uses, from food cans, foils and mirrors, to airplanes, electric vehicles and solar panels.

It is often alloyed with other metals, such as copper, magnesium, silicon, tin, zinc and manganese. Aluminum alloys are lightweight thanks to aluminum’s low density, making them desirable for use in aircraft, spacecraft and EVs.

Its flexibility and conductivity have also made it useful for applications such as high voltage power cables for transmission lines. Aluminum is also used in certain electric vehicle batteries, namely lithium-nickel-cobalt-aluminum oxide batteries, also called NCA batteries.

Aluminum demand trends

Fortune Business Insights states that the global aluminum market is set to grow at a CAGR of 6.2 percent between 2024 and 2032 to reach US$403.29 billion. The biggest driver of this growth will be the transportation sector, including aerospace, automotive and marine industries.

“This metal is highly preferred by automotive engineers and designers for its ability to reduce emissions and increasing fuel economy,” noted the research firm. “Electric vehicle manufacturers are incorporating this metal to reduce the weight of the vehicle and achieve a better driving range.”

For its part, Fact.MR estimates that the aluminum alloys market will exceed a value of US$327 billion by 2034. Cast aluminum alloys are now widely used in automotive and aerospace applications, the research firm’s report highlights, and growing demand for electric vehicles is driving the use of aluminum-tin alloys. This segment is expected to be a major growth driver for cast aluminum alloy sales going forward into the future.

Some of the biggest markets for aluminum are the United States, China and Germany. Aluminum alloys for infrastructure development and aircraft manufacturing are major sectors of demand growth in the United States. For China, its massive EV manufacturing industry is seen as a major source of demand growth for aluminum alloys, whereas in Germany, the broader automobile manufacturing industry is seen as a significant driver of demand growth.

Aluminum supply trends

The aluminum supply chain is complex due to the steps involved in the metal’s production.

The top aluminum producing countries are China, India and Russia. Worldwide aluminum production was 70 million metric tons (MT) in 2023. China, the biggest aluminum producer, produced 41 million MT — a record high for the second consecutive year. The country’s aluminum output is nearly six times higher than that of India and Russia combined.

Reuters attributed China’s record production in 2023 to “strong operations in some of China’s main producing regions, amid profitable conditions, and new projects, chiefly in the northern Inner Mongolia region, that came online.”

In terms of bauxite mine production, China ranks third behind Australia and the Republic of Guinea. Together, they represent 72 percent of the 400 million MT of bauxite produced globally in 2023. However, Australia and Guinea export the majority of their bauxite output to China.

It’s easy to see why the Asian nation has significant control of global aluminum supply. Investors interested in the aluminum market would do well to keep an eye on market trends in China as they can have an outsized role in influencing prices for the industrial metal.

However, supply from China has faced restrictions in years past — notably, the Chinese government has implemented anti-pollution policies that have affected its aluminum industry, which generates significant pollution. This has also led it to

But that’s not the only weight on China’s aluminum output. Higher energy prices have prompted Chinese smelters to slash aluminum production (an energy-intensive process) as a cost-cutting measure. China’s ongoing drought has also continued to strain the nation’s hydroelectric energy generation, and in turn its energy-intensive aluminum production.

Not surprisingly, the constraints on energy increased aluminum prices beginning in 2021 to levels not seen in over a decade. And this trend continued throughout 2023, resulting in a 9.1 percent boost in aluminum futures prices on the Shanghai Futures Exchange, reported Reuters.

For 2024, China is expected to post another record year of aluminum production due to more ample energy supply. The country’s hydropower reservoirs have benefited from heavy rains this year, resulting in a 22 percent increase in hydro generation in the first eight months of the year, reported Bloomberg. China also has vast stockpiles of coal to power its aluminum smelters if its hydropower fails to meet demand. As of November 7, 2024, aluminum futures prices were up more than 15 percent since the start of the year.

How to invest in aluminum

There are a number of entry points for investing in the aluminum market, including bauxite mining stocks and aluminum stocks, aluminum ETFs and aluminum futures. We take a look at each of those ways to invest in molybdenum below. All data and information was current as of November 7, 2024.

Aluminum, alumina and bauxite mining stocks

Aluminum and bauxite mining stocks are arguably the best place to start when investing in the metal. There are a number of publicly traded mining companies with shares listed on major global exchanges. The companies below had market capitalizations above $10 million when data was retrieved.

Vertically integrated aluminum companies

Alcoa (NYSE:AA)
Alcoa, one of the world’s top aluminum producing companies, is active across the aluminum value stream, from bauxite mining and alumina refining to aluminum smelting and recycling. The company has 28 operations across nine countries, including the Huntly and Willowdale bauxite mines in Western Australia and the Juruti and Poços de Caldas bauxite mines in Brazil. Alcoa is also known for its high-quality aluminum products including billet, foundry, rod and slab as well as its patented alloys.

Century Aluminum (NASDAQ:CENX)
Century Aluminum is a major producer of standard-grade, high purity and value-added primary aluminum products and the sole producer of aluminum used for US fighter jets. It has three aluminum smelting facilities in the United States: Hawesville, Sebree and Mt. Holly. Its Grundartangi plant in Iceland has one of the lowest carbon footprint aluminum smelters in the world. The company also operates the Jamalco bauxite mining and alumina refining operations in Jamaica.

Norsk Hydro (OTCQX:NHYDY,SWX:NHY)
Norsk Hydro is another major aluminum producer with diverse assets across the value stream. The Norwegian company has significant bauxite mining and alumina refining operations in Brazil, including the Paragominas bauxite mine and Hydro Alunorte refinery. The company’s value-added aluminum products serve numerous industry applications, including automotive, construction, marine and electronics.

Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO)
Rio Tinto is another global leader in the aluminum market with a vertically integrated value chain. Whether wholly owned or through joint ventures, the company has four bauxite mines across Australia, Brazil and Guinea; four alumina refineries across Australia, Brazil and Canada; 14 aluminum smelters across Canada, Australia, New Zealand, Iceland and Oman; and seven facilities across the US and Canada producing recycled aluminum.

South32 (ASX:S32,OTC Pink:SHTLF)
South32 is an Australia-based diversified metals and mining company with aluminum at the core of its global operations. The company is mining bauxite and refining alumina at Worsley in Australia and at the Mineração Rio do Norte mine in Brazil. Its aluminum smelters are located in South Africa, Mozambique and Brazil. South32’s Hillside aluminum facility in South Africa is the largest in the southern hemisphere.

Bauxite mining and alumina companies

Canyon Resources (ASX:CAY)
Canyon Resources is developing its wholly owned Minim Martap bauxite project in the Central African nation of Cameroon. The bauxite mining company completed a bankable feasibility study in 2022 which outlines a total resource of over 1 billion MT of high-grade bauxite with estimated annual production of up to 6.4 million MT. In 2024, the project was granted a mining license and mining convention allowing for the mining and exporting of alumina and bauxite.

Impact Minerals (ASX:IPT)
Impact Minerals is fast-tracking its flagship Lake Hope high-purity alumina (HPA) project in Western Australia toward production. The project has a mineral resource estimate of 3.5 million MT at 25.1 percent alumina, for a contained 880,000 MT of alumina that can be converted to HPA. HPA is a high-value product used mainly in LED lighting, micro-LED screens and ceramic-coated separators in lithium-ion batteries.

Metro Mining (ASX:MMI)
Metro Mining is producing bauxite at its wholly owned Bauxite Hills mine in Queensland, Australia. In production since 2018, the mine produces a high alumina bauxite, which the company ships directly to offtake partners in China to be further refined into alumina and aluminum. Metro’s bauxite is used in electric vehicle and mobile phone components.

Aluminum product manufacturers

Howmet Aerospace (NYSE:HWM)
Howmet Aerospace is a leading producer of aluminum products for the aerospace, commercial transportation, defense and space industries. Its forged aluminum wheels are staples of the commercial trucking and mass transportation industries.

Kaiser Aluminum (NASDAQ:KALU)
Kaiser Aluminum is an American manufacturer of semi-fabricated specialty aluminum products for the global automotive, aerospace, engineering and packing industries. It produces value-added plate, sheet, coil, extrusions, rod, bar, tube and wire products at a dozen facilities across the United States.

Reliance (NYSE:RS)
Reliance was founded in 1939, and today is North America’s largest metals service cente company and a leading global provider of value-added metals processing services and metal products. Its aluminum products include extruded aluminum for building and construction applications as well as in the electrical and packaging industries.

Aluminum ETFs

For those investors not wanting to put all their eggs in one basket, exchange-traded funds are also a great play in the aluminum space. Here are a few to get you started.

Invesco DB Base Metals Fund (ARCA:DBB)
The Invesco DB Base Metals Fund tracks the DBIQ Optimum Yield Industrial Metals Index Excess Return. It offers exposure to a basket of key metals futures on the London Metals Exchange, including copper, zinc and aluminum. This fund is not for the newbie investor, but rather more sophisticated investors with a higher tolerance for risk.

iShares US Basic Materials ETF (ARCA:IYM)
iShares US Basic Materials ETF is an equity-based exchange-traded fund with exposure to producers in the aluminum market. While not exclusively focused on aluminum, the fund does track major aluminum equities such as Alcoa and Reliance.

SPDR S&P Metals and Mining (ARCA:XME)
The SPDR S&P Metals & Mining is an ETF that tracks the metals and mining sectors. This fund includes Alcoa and Reliance as significant holdings.

WisdomTree Aluminum (LSE:ALUM)
The WisdomTree Aluminum fund is an exchange-traded commodity designed to give investors total return exposure to aluminum futures. The fund tracks the Bloomberg Aluminum Subindex plus a collateral return.

Aluminum futures

Aluminum futures, a derivative instrument tied directly to the price of the actual metal, are another option for those interested in aluminum investing. Futures are a financial contract between an investor and a seller. The investor agrees to purchase an asset from the seller at an agreed-upon price based on a date set in the future.

Rather than intending to take possession of the material asset, investors speculating in the futures market are instead making bets on whether the price of a particular commodity will rise or fall in the near future.

For example, if you buy an aluminum futures contract believing the price of metal is set to rise, and your prediction proves correct, you could gain a return on your investment by selling the now more valuable futures contract before it expires. However, be advised that trading futures contracts is not for the novice investor.

Aluminum futures are available for trade through the London Metals Exchange (LME) and CME Group.

The LME offers aluminum futures quoted in US dollars, with each contract representing 25 metric tons of aluminum, and aluminum alloy futures in contracts representing 20 metric tons.

The CME Group offers a suite of aluminum products, including aluminum futures and its newest product, aluminum options. While an aluminum futures contract only allows for trading on the date specified in the contract, aluminum options can be exercised at any time before they expire.