We are going to say something a little controversial here: it could be argued that the problem of global oversupply in the aluminum market is not most people’s focus of China – it’s Russia.
The pace of new smelter construction in China has been truly breathtaking, and it is probably fair to say that at no time in the history of the industry has so much capacity been added so quickly anywhere in the world.
Far from abating, as Chinese GDP growth has slowed and aluminum inventories around the world grow, new capacity continues to be added in China as we write. HSBC estimates a further 12.7 million tons could be added by 2016, as the Chinese aluminum industry seeks to monetize low-cost coal reserves in the northwest.
Expected rationalization of higher-cost production capacity in currently dominant Henan and other coastal states has not happened because of state support for local champions, adding to the oversupply situation and depressing utilization rates.
But China has been largely a closed market for aluminum, as this graph also from HSBC illustrates.
With export tax arrangements creating a disincentive to export primary metal, the only Chinese aluminum affecting the world market is downstream semi-finished rolled and extruded products, representing a relatively small fraction of the total 20 million tons produced annually. Net exports are running at about 1% of total production, or 200,000 tons, according to the bank’s graph.
The eastern bloc, on the other hand, is producing far in excess of what it can consume domestically, as this graph illustrates: