As always, ThomsonReuters’ Andy Home turns out some excellent commentary backed by solid statistics.
In a recent article, he reviews comments made by Alcoa Inc.’s Klaus Kleinfeld about China’s primary aluminum production leaking out of the country under the cover of the burgeoning export trade in semi-finished products. As the article explains, China exported 2.5 million metric tons of unwrought aluminum and aluminum products in the first half of the year. That was 35% or a 650,000-mt increase over the same period last year.
Untaxed Semis, Taxed Ingots
The temptation for Chinese producers to ship primary metal for export is significant in a domestic market oversupplied with unwrought primary metal, but producers are dissuaded from exporting ingot by a 15% export tax and a negative treatment on the value-added tax which is set at 13%.
Rightly in a country with high power costs, China sees exports of low-value primary aluminum as a wasteful export of energy-intensive material. Producers, though, are desperate to shift metal and the article suggests (and to Klaus Kleinfeld’s point) that a large part of this tidal wave of “semis” exports is not really semi-finished product at all, but simply primary metal either misrepresented on export paperwork or marginally re-worked to qualify it as a semi-finished product.
Many point to the fall in aluminum physical delivery premiums as support for the argument that Chinese exports of this primary-masquerading-as-semi-finished metal are a significant contributory factor to greater primary metal availability outside China.
What Does This Mean for Metal Buyers?
We have our doubts that the export of Chinese semis is causing a massive disruption in the marketplace. Chinese semi-finished product is being offered aggressively all over Asia and Europe. Chinese producers – aided by changes in export taxes and a falling Shanghai Futures Exchange base price relative to the London Metal Exchange – are able to compete in the semis market now to an extent they were not able to 12-18 months ago.
We are seeing increased market penetration and volumes hitting the European distributor and end-user markets this year. We are seeing European and Asian manufacturers lead times come down, in some cases to days, for extruded products, suggesting order books are weak.
Under such circumstances converters outside of China will not be buying as much primary metal and billet. Couple that with new Middle East smelter start-ups and metal coming off long-term financing deals earlier this year and there is enough to justify the fall in physical delivery premiums without some vast confidence trick going on in misrepresented metal exports from China. We are not saying Alcoa is wrong in making their assertions regarding this trade, no doubt there are situations in which it has happened, we just doubt it is as significant or is having as much impact as they suggest.