Consequence of Beijing’s Anti-Smog Drive? Producers Could Go Global

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Every action has an equal and opposite reaction, said Newton, and John Locke was not alone in discussing the principal of unexpected consequences — so the interest Chinese aluminum smelters are showing in expanding overseas should come as no surprise after Beijing has forced many aluminum producers to close capacity in the country ahead of the winter heating season.

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China Hongqiao Group , the world’s biggest aluminum producer, is looking into the possibility of moving recently shuttered illegal or un-permitted smelting capacity overseas, according to Reuters.

Hongqiao had to shut 2.68 million tons in annual smelting capacity in its home province Shandong at the end of July. The firm is rumored to be looking at moving this capacity to Indonesia where it already has a 1-million-ton alumina refinery.

“It’s a good time to go global,” said Chen Xuesen, deputy director of the strategy development department at state-owned Chinalco, underlining the fact that Chinese smelters are not content with the largest domestic market in the world. With that constrained, they are now looking for further expansion overseas.

China and the rest of the world, at least from a primary aluminum market perspective, have largely operated in parallel universes (a phrase coined by Alcoa’s Klaus Kleinfeld many years ago).

Impeded from selling primary ingot abroad by export tariffs, China’s aluminum industry has largely overlapped with the rest of the world only in semi-finished products. But even there, its impact has become increasingly important, achieving considerable dominance in southeast Asia and increasing penetration in Europe and the U.S.

As output cuts ramp up across China, Henan’s Luoyang Xiangjiang Wanji Aluminium announced last week that it has curtailed 30% of its aluminum and alumina capacity. In addition to primary aluminum, Hongqiao is also reported to have cut 4 million tons of alumina production.

The realization that some of this capacity may never be restarted is setting in.

Capacity closed for the winter heating season will be allowed to restart from April next year, but plants that did not have the necessary permits, and are not able to secure those permits going forward, may find their expansion opportunities are now limited within China and will look overseas in the future.

MetalBulletin’s report that government-initiated reforms have halted a total of 11.56 million tons per year of aluminum capacity in China — including 5.37 million tons per year of illegal capacity and 6.19 million tons per year of non-compliant aluminum capacity — are based on state-sponsored CNIA data. As such, they should be taken with a pinch of salt, but the fact remains annual winter closures are likely to become a permanent fixture and new permits will be increasingly hard to secure.

Ambitious producers may perceive expansion overseas as their only logical option, breaking the parallel universe model expounded by Kleinfeld.

Smelter capacity has been shrinking in the rest of the world outside China and the market has been brought back into balance as a result.

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However, China’s expansion overseas could shatter that accord.

Recent reports that China will build a 500,000 metric ton per annum aluminum smelter worth $1.6 billion in ex-Soviet Tajikistan show China’s aspirations are not confined to nearby locations like Indonesia — new operations could pop up on Europe’s doorstep, or in Africa or South America.

Comment (1)

  1. Kunal Bose says:

    Moving shuttered smelters or refineries abroad is challenging, since to start with these must have access to cheap electricity. Will the contemplated foreign sites offer logistical advantages in terms of procurement of raw materials and moving aluminium products to consumption centres? But Beijing being so determined to keep the environment clean, the aluminium industry will be desperate to find a new home abroad for capacity put to rest.

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