Andy Home@ (Repeats without change. The opinions expressed here are those of the author, a columnist for Reuters)
* Steel and aluminium sectors key targets in coal crackdown
* Markets struggling to price in supply-side adjustments
* Beijing's war on smog could spur companies to relocate
LONDON, Nov 21 (Reuters) - China's winter heating season has just begun, heralding a titanic supply chain experiment as whole industrial sectors reduce capacity or close completely to comply with the leadership's war on pollution.
The curtailments will take place across the four provinces adjacent to the cities of Beijing and Tianjin, lasting until the middle of March.
Coal is public enemy No.1 in China, making the steel and aluminium sectors -- both massive users of coal-fired power -- key targets for the winter cuts.
Neither sector has experienced supply-side adjustments of this speed and magnitude before and markets have struggled to price in expectations.
Even calculating the scale of closures is still a jigsaw puzzle of city and regional mandates and potential offsets, further confused by notoriously problematic official production figures.
Moreover, in the case of aluminium, this is not only about aluminium smelters. The entire supply chain from petcoke and carbon anode through alumina will also reduce output.
In the case of steel, production cuts have to be balanced against the hit to demand from a complete lockdown on construction activity in the affected region.
If this is a giant pollution-fighting experiment by Beijing, it is also a giant pricing experiment for global steel and aluminium markets.
But here's what we know, sort of, so far.
ALUMINIUM - THE STING IN THE RAW MATERIALS TAIL
Aluminium smelters and alumina refineries are required to cut output by 30 percent. Suppliers of carbon products to the smelting sector have to cut by 50 percent if they meet all environmental standards or fully if they do not.
Researchers at CRU expect roughly 2 million tonnes of primary aluminium capacity to be affected, translating to nearly 840,000 tonnes of production cuts in the fourth quarter of 2017 and first quarter of 2018 combined. ("Winter policy warming anode and petroleum coke prices", Nov. 20, 2017)
AZ China, which specialises in the Chinese aluminium sector, estimates that 1.57 million tonnes of primary capacity will be affected but cautions that implementation is patchy, with only about 840,000 tonnes of capacity closures confirmed so far. ("Aluminium Monthly - Winter Shopping Guide", Nov. 20, 2017).
While Henan has expanded the scope of production cuts from the initially specified cities to the whole province, Shandong appears to be dragging its bureaucratic feet.
Authorities in the Shandong city of Binzhou have allowed Hongqiao Group, the world's largest producer, to count "illegal" potlines already closed within its winter curtailments.
This clemency seems to have been a factor in this week's sharp slide in Shanghai prices to around 15,000 yuan a tonne despite being recycled news, underlining the absence of official clarity.
Further up the production chain, 5.32 million tonnes of alumina capacity will be affected, according to AZ China.
Confirmed closures are running way below that figure, but alumina refineries can be shut down more quickly than smelters, meaning that many operators will have maximised output right up to the mid-November deadline.
Both CRU and AZ China expect severe disruption to the supply of calcined coke and carbon anode, with domestic market shortages generating increased price volatility.
China is a key supplier of both products to smelters in the rest of the world and exports were already on a downward trend this year, reducing availability and lifting prices.
These often-overlooked inputs to the aluminium-making process could yet be the transmission mechanism by which China's problems with smog become everyone else's problem, too.
STEEL - NOT JUST ABOUT PRODUCTION
Trying to calculate the winter heating season's impact on the steel sector is even more problematic because there are more moving parts.
Sinter and iron-making facilities are required to shut 50 percent of capacity, with this "hot metal" hit translating into less crude steel production.
CRU's base-case scenario envisages 66 million tonnes of lost "hot metal" production over the winter, but there are important offsets from higher production in unaffected parts of the country, increased use of scrap and drawdown of existing steel stocks. ("Winter production cuts heat up steel prices", Nov. 21, 2017)
Factoring these into the equation puts the impact on steel product supply between now and March at a net 14 million tonnes.
Analysts at Wood Mackenzie do the same mathematics and come up with a figure of 4 million tonnes for the fourth quarter.
However, supply is only one part of the picture. A key differentiator between aluminium and steel is the latter's dominant use in the construction sector.
Ming He, Senior Consulting Manager at Wood Mackenzie, says that all construction activity has already been halted in the Beijing, Tianjin and Hebei province.
The demand hit of 9.6 million tonnes will exceed the supply hit in the current quarter, putting pressure on steel prices, Wood Mackenzie says.
CRU thinks there will still be a 1-2 million tonne tightening over the full season, generating higher prices.
These numbers might look marginal in the context of Chinese steel production of more than 800 million tonnes last year. But the potential impact on margins and price is much higher because, according to CRU, "all parts of the supply chain are being stretched to barely meet market demand".
The important context here is the huge amount of "illegal" steel-making capacity that has been closed in China over the past two years.
This has served to lift utilisation rates across the official sector, leaving little room for increased production outside of the smog-zone regions.
The range of steel scenarios is very broad indeed, but there are some core early takeaways.
The winter heating season should depress demand for iron ore, with negative price implications, but lift demand for scrap, with positive price implications.
Exports of steel products, already running 30 percent below 2016 rates, should decline further.
WAR ON SMOG HAS JUST BEGUN
Assessing the winter heating impact on steel and aluminium is very much a work in progress, so expect multiple updates along with much news, both recycled and new, in the months ahead. Official production figures will be pored over, but these have proven unreliable signposts in the past.
But if there is one undeniable hard fact amid all this uncertainty, it is Beijing's commitment to do whatever it takes to deliver on President Xi Jinping's promise of "blue skies".
The war on smog has just begun and could run for a long time. If it does, there could yet be farther-reaching implications for the steel and aluminium supply chains.
Hongqiao, for one, is already thinking about transferring its aluminium capacity out of the country to Indonesia.
It might not be the only Chinese company reassessing its long-term future. (Editing by David Goodman)