China: From aluminum savior to scapegoat

LONDON: Western producers of aluminum have long extolled China as the shining light of the light metal's bright future.
As with all things metallic, the country is the single most powerful driver of global demand for aluminum.
It's not just aluminum's usage in construction and infrastructure that excites but also its linkage with consumer spending, first and foremost in the form of China's fast-rising car ownership.
US heavyweight Alcoa, for example, estimates that Chinese consumption grew by 15 percent last year, compared with global growth of 10 percent and just 6 percent in its own home North American market.
This year, according to Alcoa's most recent quarterly presentation to analysts, it expects Chinese consumption to grow by another 11 percent, far outstripping expected growth of 4 percent in the rest of the world.
But right now China finds itself on the receiving end of some pointedly critical comments about how it's running its aluminum sector.
Oleg Mukhamedshin, head of equity and corporate development at Russian aluminum giant UC RUSAL called on all producers to "take responsibility for decisions on production volumes and more actively cut unprofitable production".
The latest batch of global production figures from the International Aluminium Institute (IAI) show why RUSAL and other non-Chinese producers are so frustrated.
Production in the rest of the world dropped another gear in May as producers continued responding to low prices and high stocks.
At 24.78 million tons, annualized collective output has now declined by 1.13 million tonnes since October, when the London Metal Exchange aluminum price first started cutting into the production cost curve.
In stark contrast Chinese production surged by the same amount, 1.13 million tons, between April and May alone to hit another fresh record high of 19.76 million tons annualized.
Such fast incremental growth at a time when China's broader economic engine is slowing shatters any prospect of the country saving the rest of the world in the form of accelerated imports.
True, Chinese imports of primary aluminum have spurted higher this year to the tune of 160 percent in the January-April period. But at 227,000 tonnes the volume is a drop in a very large ocean.
It is also eclipsed by the amount of metal that is still leaving the country in the form of semi-fabricated products, 880,000 tons in the first four months of 2012 alone, all of which displaces demand for primary metal elsewhere.
What really irks Mukhamedshin and no doubt plenty of others outside of China is the fact that local governments are now subsidizing high-cost smelters to prevent them closing.
This is coming in the form of discounts on the price of power, a key cost input in the aluminum smelting process, and is happening in traditional production hubs such as the provinces of Henan and Guizhou.
These of course are the very smelters that "should" be closing, given their positioning towards the top of the cost curve.
The fact they are not, even as new smelter capacity is being built in lower-cost provinces such as Xinjiang and Qinghai in the northwest of the country, explains why Chinese aluminum production is still growing and not contracting.
However, what is happening in China is simply a mirror reflection of what is happening everywhere else.
In a sector characterized by excess capacity and historical oversupply, evidenced by those millions of tons of metal gathering dust in warehouses, survival is about moving down the cost curve.
Just as Alcoa is building new capacity in Saudi Arabia and RUSAL itself is driving deeper into Siberia, so too are Chinese producers moving westwards to tap the potential of stranded coal reserves.
As they do so, it is natural that governments in higher-cost countries or provinces fight to stop the loss of tax revenue and jobs.
Only Australia seems intent on closing out its aluminum smelter sector by adding to the cost burden in the form of a carbon tax.
Others, such as Italy, are actively resisting planned closures, witness Alcoa's compromise with the local government on the future of its Portovesme plant.
Witness also, topically enough, the legal to-and-fro between Alcoa, Italy and the European Commission, which has classified previous power arrangements for Alcoa's smelters in the country as illegal state aid.
Right now it seems unlikely there will be any step-change in China's aluminum production dynamic.
Older, higher-cost capacity will continue closing but, thanks partially to government intervention, at a slower pace than new, lower-cost capacity comes on line in different parts of the country.
The likely outcome is for national run-rates to keep trending higher and national production costs to keep trending lower.
There is certainly no reason to expect any step-change in Chinese imports, which will continue to fluctuate with arbitrate opportunities.
That means that if the likes of RUSAL want to help stabilize the market, they will have to stop waiting on China and do so themselves.
It's not as if Western production itself has been curtailed too dramatically. That 1.13-million ton drop in annualized output over the last six months flatters to deceive.
Part of it has come in the form of non-price-related cutbacks, such as the outage at BHP Billiton's Hillside smelter in South Africa and the continuing lock-out at Rio Tinto's Alma plant in Canada.
Moreover, the pace of shutdowns has noticeably slowed in the last couple of months with only the widely-expected full curtailment of Norsk Hydro's Kurri Kurri smelter in Australia adding any fresh impetus.
Nor, for that matter, has RUSAL itself cut back production, although it has been talking for several months now of curtailments in the second half of this year.
If it's serious about all producers taking "responsibility for decisions on production volumes," it might want to take a look at its own run-rates rather than blaming China.
— Andy Home is a Reuters columnist. The opinions expressed are his own.