Without Subsidies, China's Aluminum Companies Would Be Bankrupt

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second FT article (in addition to the first on Chinese manufacturing overcapacity we covered in Part One) looks at a range of industries to illustrate that the problem is not restricted to just shipbuilding.

No stranger to these pages is aluminum, for which, the paper notes, new capacity is being added even as the economy cools.

China produces nearly half of the world’s aluminum and steel and about 60% of the world’s cement, a position “achieved” as a result in part of a massive post 2008 infrastructure stimulus.

Download the latest Monthly MMI® Report – covering the Aluminum and Steel markets.

Now, however, more than half of China’s aluminum producers operate at a loss. Despite this, more smelters are being built nationwide, even though producing the metal requires huge amounts of energy, water and bauxite, all of which are scarce in China.

The FT notes that for global manufacturers, the China Effect over the past decade has been fearsome. It has destroyed jobs and capacity all over the world, shuttering factories in competitor nations. For example, Li Junfeng, a senior energy policy adviser at China’s state planning agency, is quoted as likening the country’s solar sector to a patient on life support and says at least half of global solar capacity needs to be shut.

“Overcapacity results in low-price competition; all industries experiencing overcapacity have this problem,” Mr. Li says, but that overcapacity comes as a result of subsidies and incentives offered principally by local governments to create local champions. To quote the FT, several studies have found that the ability of Chinese industry to dominate global manufacturing in certain sectors is largely due to subsidies, most of which are provided by local and provincial governments, according to the article.

Quoting a recent study by Usha and George Haley, US-based academics, who studied how Chinese steel, glass, paper and auto parts producers turned from bit players and net importers to the world’s largest manufacturers and exporters in just a couple of years: in each of these highly fragmented, capital-intensive industries, labor accounted for between just 2% and 7% of costs and the vast majority of companies enjoyed no economies of scope or scale.

“Our findings contradict the widespread belief that China’s enormous success as an exporting nation derives primarily from low labour costs and deliberate currency undervaluation,” Usha Haley is quoted as saying. “There is enormous overcapacity and no gauging of supply and demand and we found that subsidies account for about 30% of industrial output. Most of the companies we looked at would probably be bankrupt without subsidies.”

Concludes in Part Three.

Read Part One here.

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