This morning in metals news, the world’s top aluminum producer was flooded after Typhoon Lekima, Chinese cities did not meet targets to cut pollution and iron ore prices continue to […]
Tag: China Hongqiao
This morning in metals news, President Donald Trump again expressed support for imposing tariffs on imports (as the U.S. considers further tariffs on Chinese goods), shares of the Chinese aluminum […]
This morning in metals news, a rival of Kobe Steel has taken orders from Kobe customers, a Chinese metals magnate grapples with governmental control and 3D printing can strengthen stainless […]
You don’t come from near obscurity to become the largest aluminium producer in the world, seemingly overnight, without courting some controversy — but China Hongqiao Group seems to have garnered […]
China’s aluminum industry is under siege. You wouldn’t think so from the booming production figures, rising prices and howls of protest from aluminum producers in the rest of the world.
Benchmark Your Current Aluminum Price by Grade, Shape and Alloy: See How it Stacks Up
But, arguably, China’s aluminum industry is the victim of its own success.
[caption id="attachment_81470" align="aligncenter" width="550"] The Chinese aluminum industry has been able to cut costs by essentially selling liquid metal to nearby product manufacturers. Source: Adobe Stock/Kybele.[/caption]
On the one hand, the political heat is rising as China’s production capacity has exceeded 50% of global output even as a combination of low aluminum prices and the collapse of physical delivery premiums in recent years has forced producers in the rest of the world to rationalize production, mothball plants and shelve capital investment plans that do not seek to simply slash costs.
Rise of Semis Buoys Industry
The rise of Chinese semi-finished product exports has stimulated a wave of legal challenges around the world alleging unfair trade practices and causing considerable uncertainty for Chinese manufacturers with aspirations beyond their own shores.
Within China, the breakneck pace of expansion had generally been viewed with a sense of pride as to what the country, particularly the private sector, had achieved over the last decade. A combination of adopting cutting-edge technology, exploiting otherwise remote coal reserves in the Northwest for cheap power and, let’s be honest, a ballsy confidence in borrowing billions from banks to fund millions of metric tons of new capacity has resulted in a historically unprecedented rise in aluminum capacity over just the last 10-15 years.
China’s traditionally opaque reporting structure has allowed some firms to present their results in a less than honest way. This is not unique to the aluminum industry by any means, but a recent article by Aluminium Insider calls into question the finances of the world’s largest aluminum company China Hongqiao after its shares were suspended from the Hong Kong stock exchange this month.
A Difficult Accounting
China Hongqiao Group Limited saw the trading of its shares halted last week, after its auditors, Ernst & Young, announced that the publication of its annual results would be delayed. Not surprisingly, no specific details were given but equally unsurprisingly the firms bonds took a hit as regional financial firms urged caution suggesting it will find refinancing its debt more expensive and difficult in the year ahead.
Part of the problem seems to be how China Hongqiao has been reporting its profits and handling internal transfer pricing. Like many of the new breed of Chinese aluminum producers, China Hongqiao has captive power production but since 2010 the firms profit margins have diverged from most of its peers, maintaining in excess of an 8% margin even when many of its domestic competitors fell into periods of loss. Even during periods when the coal price rose the reported cost of power produced by China Hongqiao dropped suggesting the firm was trapping profits in the smelting division while hiding losses in power generation. Likewise it has been suggested that China Hongqiao has declared transfer prices from its alumina production division roughly 20% below those of similar companies operating in the same provinces.
Two-Month Trial: Metal Buying Outlook
It is not just the company’s investors who are keen to see the results of E&Y’s audit next month but also the global aluminum industry will be keen for a peek behind-the-scenes into the sometimes murky world of Chinese aluminum producers, cozied by their banks and political connections, which may have encouraged them to bend some rules in the process of exploiting what has been the world’s fastest growing and least tightly regulated aluminum market.
As a counterbalance to our article this week about proposed tariff changes intended to counter the flow of unwrought metal out of China, China Hongqiao, the world’s largest aluminum producer, is reported in the South China Morning Post rejecting concerns the Chinese aluminum industry has a major overcapacity problem.
Two-Month Trial: Metal Buying Outlook
In fact, in the words of Chief Executive Officer Zhang Bo, China’s high demand for aluminum and improving “self-discipline” in production and capacity expansion has already resulted in a much healthier state than some analysts’ believe. As in steel — and several other commodities — China’s position in the global aluminum market cannot be overstated, but unlike steel an export regime is supposed to keep excess production from being exported onto the world market.
China’s Aluminum Demand and Supply
Broadly speaking, up to a couple of years ago that held good. China accounts for some 53% of global demand of 30 million metric tons in the first half of this year and is self sufficient in primary aluminum although it does import bauxite and alumina, intermediate products.[caption id="attachment_75286" align="aligncenter" width="550"] How much excess aluminum is being produced by Chinese Smelters? Source: Adobe Stock/Pavel Losevsky.[/caption]
Zhang Bo says given that the industry’s (in China) overall plant utilization exceeds 80%, and over 80% of the smelters are profitable, “nobody should have the idea that the industry is in major overcapacity.”
He also noted mainland China’s 8.6% year-on-year first-half aluminum demand growth has far outstripped output growth of just 1% with robust demand from the transportation, electronic and electrical markets this year. To be fair, China Hongqiao figures appear — on the face of it — to support his position. On Friday the group posted a 20.7% year-on-year rise in net profit for the first half to $510 million (3.28 billion CNY) as a 9% fall in selling prices was more than offset by a 25% growth in sales volume the article stated.
Nor is China Hongqiao an exception. The industry’s daily output volume has surged from a low of around 75,000 mt early this year to 90,000 mt now, not far short of last year’s highest levels, ANZ Senior Commodity Strategist Daniel Hynes is quoted as saying.
Earlier promises of smelter closures when prices were around $1,599/mt (10,600 CNY per mt) are now a distant memory, as prices have surged to $1,885.95/mt (12,500 CNY) today gradually idled capacity is being brought back into production. Nearly 200,000 mt of annual capacity having resumed in the second quarter and another 300,000 mt is due to come back in the third quarter, according to the SCMP.
Smelting Capacity Expands
Earlier targets to cut 4.5 million mt of outdated aluminum capacity, even if implemented, will be rapidly replaced by some 3.7 mmt-a-year of new capacity scheduled to come onstream in the second half of this year alone. China Hongqiao expanded its annual aluminum smelting capacity by 29.8% to 5.89 mmt in the 12 months to June 30, and Zhang expects it to reach 6.5 mmt by year-end.
China Hongqiao will, of course, talk up the market and downplay suggestions of excess production. The company’s share price has done well on a resurgent aluminum price and rising profits, the last thing Zhang Bo wants is talk of overcapacity.
China’s aluminum semis exports have reduced a little this year, suggesting domestic demand is robust and mills do not have such a pressing need to dump metal abroad as they did last year. Still, with such a dominant position in the global aluminum market a sneeze at home could easily result in a cold for smelters in the rest of the world.