(The opinions expressed here are those of the author, a columnist for Reuters)
* China critical to global supply-demand balance
* Output statistics require close inspection
* Chinese aluminum production: http://tmsnrt.rs/2DwTHg7
LONDON, Jan 24 (Reuters) - Chinese aluminum production jumped by 15 percent in December, with full year output at a record 32.27 million tonnes.
This is something of a surprise, given the closure of "illegal" capacity around the middle of 2017 and subsequent curtailments by producers in the region around Beijing for the winter heating season.
But it does tally with a startling build in stocks registered with the Shanghai Futures Exchange (ShFE), which closed last week at a record high of 783,759 tonnes.
So what's going on?
It should be an easy question to answer. Not only is China the world's largest producer of aluminum, but its internal supply chain has never before been subjected to such close scrutiny by both market and media.
Moreover, since the rest of the world's production is largely flat-lining, changes in Chinese output become the critical component in any assessment of the global supply-demand balance.
Unfortunately, however, the official production figures have never been more unreliable.
Take that headline 2017 figure of 32.27 million tonnes. It's not right, as even the government statisticians now concede.
To understand what's happening in China's aluminum smelter sector, one must first get a handle on what's going on with China's aluminum statistics.
Graphic on Chinese aluminum output (with revisions):
China's aluminum supply chain has experienced two big shocks in the past 12 months.
First was the forced closure of what was designated as illegal capacity, defined as that built without full permissioning.
Second was the winter heating season curtailments, supposedly of 30 percent of capacity in the regions around Beijing from mid-November to mid-March.
Such mandatory down-time has spread beyond aluminum smelters to upstream producers of alumina and other raw material inputs in the smelting process, such as carbon anode and pitch.
The double-pronged campaign represents two sides of the same policy coin, namely a streamlining of the country's industrial base to deliver on President Xi Jinping's promise of "blue skies" instead of choking smog in Chinese cities.
So how big a hit has Chinese aluminum production taken? Has it taken any hit at all? The headlines leave even that question open to doubt.
Official output figures from both the National Bureau of Statistics (NBS) and China's Nonferrous Metals Industry Association (CNIA) have a history of volatility at the best of times.
They turned even more problematic last year, just when the rest of the world's focus was on how much of the stuff China was producing.
The gap between the official picture and that painted by independent researchers could be measured in the millions of tonnes over the second half of the year.
There has evidently been some statistical soul-searching because CNIA has now made significant revisions to the 2017 numbers.
If you missed them, it's because the changes are tucked away in the most obscure part of the monthly snapshot of global production from the International Aluminium Institute (IAI).
The IAI's "estimated unreported" column in the world outside of China denotes those smelters that are not IAI members. The figure has been a stable 150,000 tonnes a month since the beginning of 2016.
The "unreported" column in the Chinese part of the global ledger, by contrast, has become almost a work-in-progress calculation by the CNIA, which supplies the Chinese figures to the IAI.
"Unreported" Chinese production in 2016 was 1 million tonnes and on track to be the same again last year until December.
Last month's figures showed the 2017 "unreported" component boosted to the tune of 2.65 million tonnes, backdated to the start of the year.
Taking "reported" and "unreported" production together, last year's count is now a lot bigger but also a lot closer to the independent assessments out there.
CLEARING THE MIST
It also paints a clearer landscape.
So, Chinese output, adjusted, wasn't 32.27 million tonnes, it was 35.91 million tonnes, representing 10 percent growth on 2016, also adjusted.
However, the combined adjusted figures show a significant decline in Chinese output growth over the course of the year.
The monthly growth rate decelerated steadily from almost 30 percent in January-February 2017 to only 1.6 percent in December.
December's annualized production of 35.61 million tonnes was almost 4 million tonnes lower than last year's peak of 39.31 million tonnes in June.
With both the cuts to "illegal" capacity and the winter season curtailments taking place over the second half of the year, that scale of annualized drop feels about right.
Amateur statistical sleuths might also want to compare the 2.65 million tonne adjustment in the "unreported" category to the capacity closure that top producer Hongqiao was supposed to, but didn't actually, take for the winter season.
NO CHANGE, ALL CHANGE?
Whether adjusted or unadjusted, the Chinese data for December point to a pick-up in national run-rates.
This, sigh, may be yet another statistical quirk, but it also speaks to an underlying reality, which is that even while "illegal" capacity has being curtailed, new capacity is still coming on stream.
Analysts at Wood Mackenzie, for example, claim to have already identified 4.5 million tonnes of capacity poised to start up in 2018. ("Aluminum: 5 things to look for in 2018")
This looks an all-too-familiar rerun of recent aluminum market history.
Beijing has for years been trying to restrain capacity growth in its aluminum sector. But whatever levers it pulls, the list of new smelters never seems to dwindle.
There are two differences this time around, though.
One is the new requirement that whatever capacity opens must be matched by something that closes. This is an effective brake, even if some operators have squeezed through "special situations" loopholes.
Wood Mackenzie cites two examples. Yunnan Aluminium gained an exception to the "new-for-old" rule by claiming it was a "post-earthquake reconstruction project," while some new capacity in Guangxi is being allowed as part of a "poverty alleviation project."
Such exceptions notwithstanding, Chinese policymakers may, at last, have found the best lever yet to control runaway capacity growth.
The second is the growing expectation that the winter heating season cuts are going to be an annual event.
Capacity control and environmental curtailments, in other words, are set to become hard-wired into China's domestic supply dynamics.
Keeping an accurate count of what that means in terms of monthly production is going to remain a messy work in progress, but if you're not already doing so, keep an eye on those "unreported" columns in the monthly IAI spreadsheet.
(Editing by David Goodman)