The Aluminum Association has not given up on the U.S. reaching a binding bilateral deal with China to reduce aluminum overcapacity, but the group is also holding out the option of pursuing anti-dumping or countervailing duty cases if market conditions fail to improve.
The aluminum industry is gearing up for a Sept. 29 International Trade Commission hearing, which would serve as the first step in any future trade defense cases on aluminum. The industry has taken a less aggressive approach than steel in not more pursuing anti-dumping, countervailing duties or World Trade Organization action against China on aluminum, opting instead to try to reach a bilateral or multilateral deal, Aluminum Association Vice President of Policy Chuck Johnson told World Trade Online.
“The issues of overcapacity really came to a head in the middle of last year,” Johnson said. “Prior to that, we had not been active on this issue. We have not, as an association, pursued antidumping and other trade enforcement remedies for our industry as have steel and other industries that have been facing a more endemic and long-term conditions. … But we are not taking anything off the table.”
This is a shift for the association, which represents original aluminum manufacturers throughout North America.
The ITC hearing will look at Chinese trade practices including trade policies, export duties and industry subsidization. The goal, Johnson said, is to get better documentation on China’s industry than has previously been gathered.
28 Ambassadors to the U.S. have been asked by the chairman of the U.S. International Trade Commission to testify or submit comments on global aluminum trade and the U.S. industry as the ITC continues its work on a report on those topics for the House Ways & Means Committee.
The 28 ambassadors hail from Australia, Brazil, China, France, Iceland, Italy, Korea, Bahrain, Canada, European Union, Germany, India, Japan, Kuwait, Malaysia, Mozambique, Norway, Qatar, Saudi Arabia, Turkey, Great Britain and Northern Ireland, Mexico, Netherlands, Oman, Russia, South Africa, United Arab Emirates and Vietnam.
As a counterbalance to our article this week about proposed tariff changes intended to counter the flow of unwrought metal out of China, China Hongqiao, the world’s largest aluminum producer, is reported in the South China Morning Post rejecting concerns the Chinese aluminum industry has a major overcapacity problem.
Two-Month Trial: Metal Buying Outlook
In fact, in the words of Chief Executive Officer Zhang Bo, China’s high demand for aluminum and improving “self-discipline” in production and capacity expansion has already resulted in a much healthier state than some analysts’ believe. As in steel — and several other commodities — China’s position in the global aluminum market cannot be overstated, but unlike steel an export regime is supposed to keep excess production from being exported onto the world market.
China’s Aluminum Demand and Supply
Broadly speaking, up to a couple of years ago that held good. China accounts for some 53% of global demand of 30 million metric tons in the first half of this year and is self sufficient in primary aluminum although it does import bauxite and alumina, intermediate products.
How much excess aluminum is being produced by Chinese Smelters? Source: Adobe Stock/Pavel Losevsky.
Zhang Bo says given that the industry’s (in China) overall plant utilization exceeds 80%, and over 80% of the smelters are profitable, “nobody should have the idea that the industry is in major overcapacity.”
He also noted mainland China’s 8.6% year-on-year first-half aluminum demand growth has far outstripped output growth of just 1% with robust demand from the transportation, electronic and electrical markets this year. To be fair, China Hongqiao figures appear — on the face of it — to support his position. On Friday the group posted a 20.7% year-on-year rise in net profit for the first half to $510 million (3.28 billion CNY) as a 9% fall in selling prices was more than offset by a 25% growth in sales volume the article stated.
Nor is China Hongqiao an exception. The industry’s daily output volume has surged from a low of around 75,000 mt early this year to 90,000 mt now, not far short of last year’s highest levels, ANZ Senior Commodity Strategist Daniel Hynes is quoted as saying.
Earlier promises of smelter closures when prices were around $1,599/mt (10,600 CNY per mt) are now a distant memory, as prices have surged to $1,885.95/mt (12,500 CNY) today gradually idled capacity is being brought back into production. Nearly 200,000 mt of annual capacity having resumed in the second quarter and another 300,000 mt is due to come back in the third quarter, according to the SCMP.
Smelting Capacity Expands
Earlier targets to cut 4.5 million mt of outdated aluminum capacity, even if implemented, will be rapidly replaced by some 3.7 mmt-a-year of new capacity scheduled to come onstream in the second half of this year alone. China Hongqiao expanded its annual aluminum smelting capacity by 29.8% to 5.89 mmt in the 12 months to June 30, and Zhang expects it to reach 6.5 mmt by year-end.
China Hongqiao will, of course, talk up the market and downplay suggestions of excess production. The company’s share price has done well on a resurgent aluminum price and rising profits, the last thing Zhang Bo wants is talk of overcapacity.
China’s aluminum semis exports have reduced a little this year, suggesting domestic demand is robust and mills do not have such a pressing need to dump metal abroad as they did last year. Still, with such a dominant position in the global aluminum market a sneeze at home could easily result in a cold for smelters in the rest of the world.
Recently we talked about the decline in aluminum exports this year. China exported 390,000 metric tons of unwrought aluminum in July, down 9.3% from July of last year. Chinese aluminum exports have fallen around 7% for the first seven months of 2016. Lower aluminum exports are supporting aluminum prices this year.
Despite the fall in exports, the U.S. is considering asking for a reclassification of aluminum products to stop a flood of “fake semi-finished” aluminum products entering the global market. The reason is that Chinese aluminum exporters seem to be avoiding export duties while simultaneously qualifying for Chinese export subsidies for semi-finished products, for products that are being shipped specifically for remelting as unwrought. Read more
I think it’s called the law of unintended consequences and it goes something like this: Government can take action or make a rule for the best possible reason but, sometimes as a result, there are unintended consequences that make the original decision seem stupid.
So is the case with China’s export rebate scheme, the original rebate of tax on export of value-added products had a certain logic to it. China is not a low-cost producer of power and to support all exports of energy-intensive metals such as aluminum was a senseless act, while supporting exports of higher value alloys and forms had a certain logic for a country looking to develop its indigenous technology and capability to supply a rapidly growing domestic and regional market.
Supporting exports of unwrought metal, it was deemed, was tantamount to subsidizing the export of energy as a third of the cost of unwrought aluminum is made up simply of electricity costs, so exports of unwrought metal incur a 15% export duty whereas exports of value-added categories attract up to a 13% rebate of VAT costs. So, China split its subsidies scheme based on the harmonized tariff system supporting products falling in the value-added categories but not the basic 76.01 Unwrought Aluminum category of material suitable only for re-melting. Read more
U.S. trade authorities are considering asking for a reclassification of aluminum products in the wake of China’s exports of aluminum semi-finished products. Architecture billings in the U.S. were still up in July.
The U.S. is consulting other governments on proposed changes it has drafted to the Harmonized Tariff Schedule (HTS) meant to stop a flood of “fake semi-finished” aluminum products entering the global market, almost always from China, that evade export duties while simultaneously qualifying for Chinese export subsidies.
Aluminum industry and Customs and Border Protection sources told World Trade Online the U.S. proposal, still in draft form, would reclassify semi-finished products shipped specifically for remelting as unwrought, or raw aluminum. Semi-finished products are usually an aluminum alloy that are used for further manufacturing, but the fake semi-finished products are almost pure aluminum and cannot be used for any other purpose than remelting.
Charles Johnson, vice president of policy at the Aluminum Association, said a common fake semi-finished product exported from China is labeled for customs purposes as aluminum alloy coils, which are used for airplane wings, auto bodies, roofing and aluminum cans. The coils are sold – among other items – under HTS headers 76.06, which evades China’s 15% export duty imposed on unwrought aluminum and makes the product eligible for export subsidies that start as low as 13%.
Architecture Billings Up Again, Pace of Increase Slows
The Architecture Billings Index was positive in July for the sixth consecutive month, and 10th out of the last 12 months as demand across all project types continued to increase. An economic indicator of construction activity, the ABI reflects the approximate nine to 12 month lead time between architecture billings and construction spending.
The American Institute of Architects (AIA) reported the July ABI score was 51.5, down from the mark of 52.6 in the previous month. This score still reflects an increase in design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 57.5, down from a reading of 58.6 the previous month.
According to Reuters, China has accounted for most of the demand growth since the commodities super cycle started in 2002, while over the same period consumption in the other parts of the world has stagnated or fallen as economic growth slowed. So, after a solid run this year for the copper price, the London Metal Exchange has risen from a six-and-a-half year low of $4,318 a ton in January to between $4,500 and $5,000 now. It should come as no surprise that warning bells are being rung in the face of weakening Chinese demand.
Imports Down… Supply Up?
China’s copper imports were down an annual 14.3% in July at 360,000 metric tons, Reuters reports, as the stimulus measures announced last year and early this year begin to lose their earlier impact. Much of the demand strength, such as it is, is currently attributed to speculative activity rather than real market demand. Shanghai stocks are rising suggesting metal being imported isn’t being consumed.
Unlike steel, copper demand is not as heavily tied to the housing market in China. Demand comes from a variety of sectors, most of which benefited earlier this year from a surge of investment but which are now weakening as that stimulus wanes. Investment in the state grid and power industry accounts for about one-third of China’s copper demand, according to Reuters but demand is already said to be slowing, as is that in property and construction, which account for a smaller 20% of copper consumption.
CRU is quoted as saying “In the consumer sectors, demand from the auto sector is steady. Exports helped demand for air conditioners, but domestic sales were sluggish and that isn’t going to change much in the second half.”
Second Half Forecast
Not surprisingly, many are seeing falling prices in the second half, Goldman Sachs forecasts copper prices at $4,200 in six months and $4,000 in 12 months as a wall of supply — forecast by the bank to hit 4.2% growth this year — hits a stagnant demand market. Predictions of supply and demand balance vary considerably underlying the level of uncertainty but HSBC is predicting surplus as this graph from its recent Quarterly Metals & Mining Report shows.
This prediction is made with a 5% disruption allowance built in, but according to Bloomberg 2016 has been the year for which mine supply has been the least disrupted since 2004. Contributing to the surplus supply position, this has impacted prices and Bloomberg says after a rise of 3% this year prices have already fallen back 1.9% this month, maybe forewarning of more to come.