China’s Aluminum Industry Not So Isolated Anymore

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China’s aluminum industry has been termed as operating in a parallel universe by Alcoa’s Klaus Kleinfeld. It’s been referred to as operating in a totally different universe by Andy Home in a Thomson-Reuters article.

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The term refers to the fact that although China produces and consumes roughly half the world’s aluminum, the primary metal side of the equation is locked within the country by a hefty 15% export tax imposed back in 2006 in recognition that exporting aluminum is akin to exporting energy with power making up such a significant percentage of the production costs.

China is not a low-cost power base and, as such, it makes no sense to export high energy content basic products like primary aluminum. Not so with downstream products, though, more basic semi-finished products such as bars incur only a 5% export tax whereas more sophisticated downstream products attract a tax rebate. Home’s article addresses the shift in the western world supply balance from surplus to deficit compared to China’s, which is still very much in surplus. There is some debate about whether the western world is in deficit already this year with only four of fourteen analysts in a recent Reuters poll willing to say they believed the market to be in deficit now, but nearly half felt it would be in 2015.

Rusal is quoted in typical bullish tone saying in the mill’s opinion the world would see a 1.5 million-ton deficit in 2014. A bit much, but the rise in the LME price at the same time as physical delivery premiums have increased suggests they may be closer to the mark than those analysts not even seeing a deficit next year.

China Net Exports

The article highlighted the rise in Chinese exports of semi-finished and finished aluminum products, more from the cautionary point that misreporting of commodity codes in order to attract an export rebate rather than an export tax may well mean some part of China’s semi-finished product exports are in fact little more than primary aluminum. The example used was Continuous-Cast Hot-Rolled coil, which is exported only to be melted down as primary metal elsewhere. In part, this could explain the rise in semi-finished exports at a time when the SHFE has been at a premium to the LME, in theory making exports comparatively unattractive to Chinese downstream producers.

China Alu Imports:Exports

It’s true that it tends to only be more sophisticated plate and extruded products that are regularly exported from China, basic products are rarely competitive but the risk to western producers is this could change with a stroke of the pen in Beijing. The swing factor is tax rebates and if Beijing decided it was in the best interests of China’s beleaguered primary producers to help their clients buy more metal by changing those value-add tax rebates, it could be done, relatively speaking, overnight. For the time being, Beijing seems more keen on reining in further smelter production and making life easier for them is not high on their list of priorities. Exports are rising and with such a massive processing industry a move from 2% of total production going as exports to 10% would represent a tsunami of semi-finished metal flooding into western markets.

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