China is both the world’s largest aluminum producer and consumer. So, not surprisingly, what happens in the Chinese market has a major impact on global aluminum prices.
There was a time some years ago when China’s primary aluminum market operated largely in isolation, with primary producers prevented from exporting by a 15% export tariff on aluminum ingot, on top of the 17% domestic VAT.
This was the situation Alcoa’s Klaus Kleinfeld referred to as China’s parallel universe.
The export tariff has served global primary aluminum producers in the ROW well by limiting the impact China’s massive primary production capacity would otherwise have had. You only have to look at the deflationary impact of Chinese steel exports on global steel prices to understand the impact wholesale exports of primary metal from China would have had on the LME aluminum price.
Every action has a reaction, Newton told us, and the Chinese domestic market’s reaction to tariff barriers has been that the domestic Shanghai Futures (SHFE) market has danced to two tunes at the same time.
It is not immune to global aluminum prices and, therefore, the direction of the LME, as consumers are free to import metal if domestic prices rise too far. Likewise, if domestic prices collapsed, downstream producers of semi-finished products become fundamentally more competitive, allowing them to export semi-finished products and, via the demand for primary metal that those exporters generate, encourage domestic ingot prices to rise.
Over the last year we have seen LME aluminum inventory fall while SHFE has been on a relentless rise. Not surprisingly, the SHFE aluminum price has fallen to a discount from the LME when VAT is stripped from the price. Exporters of semi-finished products are able to partially or largely reclaim the VAT element of their costs, much as exporters are in the rest of the world.
Such a differentiation between primary and downstream products, although well-intentioned, risks the less scrupulous trying to game the market.
Stories are rife, although prosecutions few, of companies exporting primary products, yet claiming they are semi-finished in an effort to avoid export tariffs. Of course, export containers undergo spot checks by Chinese customs, so much of this primary metal masquerading as semis comes out in the form of barely altered basic products. Cast slabs rolled just enough to call them plates or round cast billets hot extruded to call them bars.
So when Metal Bulletin reports that South Korean imports of aluminium plates, sheets and strips from China jumped 57.1% to 177,015 metric tons in 2017, questions are asked: is this really semi-finished material or is a proportion primary metal?
In December alone, the article states, South Korean imports from China grew 47.8% year on year to 13,278 tons. With the U.S. market becoming gradually closed to Chinese exporters and the E.U. increasingly hostile to imports, it would not be surprising if integrated primary producers sort to offload metal abroad. New smelting capacity additions have slowed recently in China and inventory has risen, suggesting the market is awash with metal despite robust demand.
Investors were expecting a greater impact from environmentally inspired closures during the winter heating season. With that nearing an end in March, you have to wonder whether the aluminum price can regain ground lost in recent weeks.