(The opinions expressed here are those of the author, a columnist for Reuters.)
* Chinese aluminium production: http://tmsnrt.rs/2eTgJGm
LONDON, July 28 (Reuters) - It's all about China.
This has been the mantra of the industrial metal markets for over a decade. The country's industrialisation and urbanisation programmes have been the core driver of demand growth across the metallic spectrum.
In the case of aluminium, however, China's influence on the global supply chain is double-edged. As well as being the biggest user of aluminium, China is by some margin the largest producer, accounting for over 50 percent of global output.
That dominant role is now in focus as Beijing launches what looks like a multi-pronged attack on its aluminium producers.
Production cuts in regions around the capital have been mandated for the coming winter heating season, which starts in November.
Separately, what Beijing terms "illegal" capacity is being closed right now. Analysts have tracked some two million tonnes of "closures" with a broad consensus another four million tonnes is at immediate risk.
Throw in rolling environmental inspections and a requirement that all new capacity must be offset by the closure of older capacity and it does look as if Beijing is finally getting serious about reining in its aluminium sector.
The rest of the world is watching closely. China's exports of surplus aluminium in the form of semi-manufactured products have set it on a collision course with the Trump Administration.
The market is also watching closely. This totally new threat to global supply is why the London price has been trading consistently above the $1,900-per tonne level for the first time in three years.
But what is actually going on? If so much capacity is being closed, why is the country's production rising? And even more critically, should be believe the official numbers?
Graphic on China's aluminium production:
China's production of primary aluminium hit a record high of 97,700 tonnes per day in June. That was equivalent to an annualised run rate of 35.7 million tonnes and represented 56.5 percent of global output, also a fresh high.
These are the official figures from China's Nonferrous Metals Industry Association (CNIA) published by the International Aluminium Institute.
Counting aluminium production should be a straightforward statistical exercise. Aluminium smelters are big and in the case of the new generation of plants in China very big indeed.
But the official numbers, which is all most of us get to see, raise more questions than they answer.
It's not just CNIA's habit of occasionally throwing large historical revisions into the mix, it's the monthly volatility that has become a running feature of the numbers.
June's annualised run rate, for example, was 2.4 million tonnes higher than that in May. The scale of that change, even allowing for the number of operating smelters in the country, stretches credulity.
Moreover, industry specialists such as Paul Adkins of the AZ China consultancy now believe the official figures are diverging from reality in a different way.
AZ China does its own production count and estimates actual daily production was 104,000 tonnes in June. It also thinks there was a similar-sized undercount in both April and May.
The cumulative annual discrepancy based on the last three months would be around three million tonnes. The official figures, according to Adkins, speaking in the Reuters Global Base Metals Forum on Thursday, are "misleading to say the least".
The disappearing tonnage in the official figures coincides with Beijing's edict on closing "illegal" capacity, raising the intriguing possibility that whoever counts China's production has simply eliminated "illegal" smelters, irrespective of whether they have been closed or not.
If so, one of the first casualties of the drive to clean up the country's aluminium smelter sector might turn out to be statistical transparency.
This is a potential nightmare for a market which has pinned so much bullish expectation on Chinese capacity closures. If we can't trust the official production figures, how will we know how much capacity is being taken off-line?
GONE TODAY, BACK TOMORROW?
And even if capacity is being taken off-line, will it stay that way?
The "illegal" capacity currently being targeted by Beijing means that which has been built without the full gamut of regulatory and environmental permits.
Just how much capacity has fallen foul of the rules seems to be a stretchable and negotiable concept. AZ China, for example, estimates that Shandong Xinfa's closure of 540,000 tonnes may be only around half of its unauthorised capacity.
More importantly, no-one is sending in the bulldozers to demolish pot lines.
Smelters with "illegal" capacity are allowed to apply retroactively for the missing permits, in theory allowing them to restart as "legal" operators just as soon as they have completed the paper-work.
The one kink in the process is the requirement that all new capacity should replace capacity that has already exited the market.
This "New for Old" policy is predicated on a Replacement Permit and there aren't enough to go round. AZ China estimates that available permits from the closure of older, often smaller smelters cover around 2.2 million tonnes, far short of the 6.2 million tonnes now seeking legal status.
An active market in Replacement Permits is evolving, in some cases between different provinces within China.
AZ China's base case, according to Adkins, is that "while we might see a largish amount of capacity exit this year, I suspect most of it will be back in operation by Q2 next year."
By which time China will be exiting the winter heating season.
The curtailment of 30 percent of aluminium capacity in the four provinces around Beijing looks non-negotiable. Aluminium is just one of a broad swath of industries linked to coal power that will have to close to improve air quality over the winter months. With "blue skies" the very publicly stated goal, Beijing looks in no mood to compromise.
However, the current campaign against "illegal" capacity has created a market for capacity permit trading, one in which demand looks much greater than current supply.
This could have profound ramifications for operators in the winter-heating-season target area, if it facilitates a transfer of production from older, higher-cost smelters in the east of the country to newer, lower-cost smelters in northwest provinces such as Xinjiang.
It's an outcome that would go down well with Chinese policy-makers, particularly given the growing international pressure for Beijing to do something about its bloated aluminium sector.
It's not an outcome that is going to make trading aluminium any easier. As the current campaign against "illegal" capacity is already demonstrating, this is a highly fluid and shifting landscape and is likely to become even more so.
And all this is happening just when the world's lens on China's aluminium production, updated monthly by CNIA, is becoming ever more blurred.
(Editing by Edmund Blair)