LONDON (Reuters) - For the world's hard-pressed aluminum producers the current outlook is the rosiest in many years.
Russian giant UC Rusal, for example, has just returned to profit for the first time in five consecutive quarters.
That's largely thanks to the combination of a robust London Metal Exchange price, currently trading around $2,100 per metric ton (1.1023 tons), its highest level since early 2013, and historically elevated physical premiums.
The price recovery is being underpinned by a tectonic shift in underlying market dynamics. After years of structural surplus, the global aluminum market finally appears to be turning to supply deficit on the back of accumulating capacity closures.
Rusal, which reported an 11-percent drop in production in the first half of this year after its own curtailments, is forecasting a 1.5-million metric ton global deficit in 2014.
That may be at the high end of the spectrum of forecasts but it no longer sounds like a producer pipe-dream. In the most recent Reuters poll of analysts four out of 14 submitting a market balance assessment for this year forecast deficit, the number rising to almost half for 2015.
The main threat to this new market optimism comes from China. Production there is still rising. More disconcertingly, so too is the stream of semi-manufactured products leaving the country.
In the world outside China aluminum production has been trending lower for a couple of years.
Annualized production in July was 24.38 million tonnes, down by over 1.5 million tonnes from the record high of 25.92 million tonnes in October 2011.
It's been a painfully slow grind lower with closures of higher-cost capacity partly offset by new start-ups, particularly in the Gulf region. And it is continuing, U.S. producer Alcoa announced earlier this week the permanent closure of its already-mothballed Porto Vesme smelter in Italy.
Over the same near three-year period Chinese production has grown by 5.7 million tonnes annualized to 23.28 million tonnes in July, according to figures from the China Nonferrous Metals Industry Association.
Not that Chinese smelters have enjoyed better margins than anyone else. But local governments and, at times, central government has subsidized losses, mostly in the form of tweaking power rates, a key determinant of an aluminum smelter's bottom line.
Even where Chinese smelters have been forced out of business, their places have been more than filled by a new generation of lower-cost smelters in northwestern provinces such as Xinjiang.
But China, to quote a phrase coined by Klaus Kleinfeld, chairman and chief executive officer of Alcoa, exists in a different aluminum universe, one that has little bearing on what happens in the rest of the world.
And to a certain extent, that is true.
Certainly, when it comes to primary aluminum, what China produces largely stays in China.
And it has done ever since the country's authorities increased the tax on exports to 15 percent back in 2006.
Since then it has been a net importer, albeit a fairly marginal one. The single exception was in 2009. Imports that year boomed after government intervention, in the form of "strategic" purchases from domestic producers, which blew open the arbitrage window.
Not that China really needs more aluminum, just that there is money to be made from playing the arbitrage, both in terms of metal prices and interest rates in the shadow credit market.
Copper may dominate the collateral finance trade in China, but aluminum is used as well, as has become clear from the ongoing investigations at the port of Qingdao. At the center of a multiple pledging scandal lie around 100,000 tonnes of aluminum and 200,000 tonnes of alumina, an intermediate raw material.
It is noticeable that China's net imports have slowed significantly over the last three months to just 19,000 tonnes from 109,000 tonnes in the February to April period.
That's probably a reflection of the relative under-performance of the Shanghai price to the LME price.
But from the perspective of Rusal and Alcoa and other Western producers, at least the net flow is into China and not outwards onto their markets.
What Western producers tend to draw a veil over, when it comes to China, is the steady flow of aluminum in other forms out of the country.
China has been a net exporter of aluminum alloy for many years. The tonnages are not huge, just 347,000 metric tons last year, but enough to counter-balance what enters in the form of primary aluminum.
The country is a much bigger exporter of products and has been for almost a decade.
This is in part down to government-led pressure on Chinese smelters to go down the value-added chain, meaning more products capacity, and in part down to the simple fact that Chinese products are highly competitive, since exporters receive a tax rebate.
There have always been suspicions that some of those product exports may not be quite what they appear, given the incentive to transform primary metal just enough for it to quality for a tax rebate as a product rather than be hit by the export tax.
Analysts fear such tax arbitrage, if it is taking place, acts to disguise the true nature of Chinese surplus.
Macquarie Bank analysts, for example, contend that primary metal is "exported under a sheet trade code such as continuous cast coil (CC coil) which is then remelted, cast and alloyed to specifications in the destination countries."
"We believe this is a trade that many Chinese aluminum fabricators started to follow over the past couple of years to avoid 15-percent tax on primary aluminum, which supports our view that some Chinese aluminum surplus has been replaced by other forms". ("Commodities Comment", Aug. 18, 2014).
Such concerns are increasing because Chinese product exports are also increasing.
Product exports rose 3.7 percent in the first half of this year but July brought a step change with 320,000 tonnes leaving the country, marking a 14-percent jump on July last year.
One month's data do not a trend make, but the underlying trend is only going in one direction and that's upwards.
It's just a question of how the trend evolves.
And most analysts seem to be expecting an acceleration in Chinese product flows over the coming months.
That makes sense, given the incentive of a higher base price on the LME relative to the Shanghai market and the shift to deficit in the world outside of China.
The danger, of course, is that Chinese surplus metal moves in sufficient quantity to fill any evolving Western deficit.
Were this just a case of semi-manufactured products, the parallel universe argument used by non-Chinese producers would still hold, albeit somewhat tenuously. But if primary metal is seeping out in thinly-disguised products form, things get a whole lot messier.
Moreover, the tensions between Chinese surplus and Western deficit are only likely to become more acute, as long as the underlying respective trends of rising and falling production continue.
It's worth remembering that it is only that 15-percent export tax on primary metal that holds back a potentially much bigger export flow. It's a dam that could be removed at the stroke of a pen in Beijing.
Editing by Keiron Henderson