WTO action reports - Paul’s comments

As most readers know, I am still on vacation, far from the world of aluminum and carbon - or at least so I thought.

Reports this morning in Reuters, Bloomberg and the New York Times (they are all claiming the story is theirs), have prompted me to put down the pina colada and pen a few thoughts. Here’s my two cents worth.

Comments from Paul Adkins, Managing Director AZ China Ltd, on the news reports of a WTO action to be launched against China’s aluminum industry.

First up, it is hard to comment without seeing the details of the action, indeed there is no action until it is lodged. The various reports say that the action will commence as early as this week.

When it comes to WTO action again China’s aluminum industry, there is a history going back to 2010. Back then several Chinese aluminum companies were affected by tariff penalties. But look at how the Chinese aluminum industry and its exports have grown since then. In 2010, China produced 16 million tons of primary metal; in 2016 that number has more than doubled. Exports have also exploded, so if the intent back then was to curb China’s enthusiasm for exports, it didn’t work.

2010 was also the time when certain analysts and commentators were confidently predicting that China would be a net importer of as much as 5 million tons of metal per year. Perhaps buoyed by those predictions, the international smelting community has had to go through a painful re-alignment of its sales forecasts.

The USA and other countries support their aluminum industries, and we have just seen the Australian government offer support to Portland smelter. The Alcoa smelter in New York State receives support from the local government. Please refer to the previous post in this blog for more information about that.

The WTO action apparently includes allegations of unreasonably low interest rates on loans, but Chinese interest rates are higher than the USA. If interest on loans is a problem, it’s in the non-payment and continual rolling over of debt. The news reports also talk of low cost electricity and alumina, but electricity costs in China are higher than many other parts of the world. Some 6 or 7 Chinese provinces provide rebates on electricity bills to some smelters in their jurisdictions, but this is no different to other governments around the world providing subsidies for the huge amount of electricity consumed in aluminum smelting. Alumina costs are also the same or higher in China than in other parts of the world, and it seems difficult to substantiate a claim otherwise.

The USA may well be successful with a WTO action, but at what cost? The USA sells more aluminium to China than the other way around, thanks to the scrap volumes, and the two sides could well get into a “tit for tat” fight. There’s the risk of China banning imports of aluminum products from the USA to China as part of a tit for tat fight - I wonder how Boeing would feel if it were not allowed to sell its aluminum products to China?

We are only days away from a new USA president, and his policy appears to be more regressive than the present administration’s. Likely the new President will want to score points and show he means business, but this could be a very dangerous fight, as many USA companies rely on low-cost Chinese metal for their fabricating shops and factories. Costs of making aluminum products in the USA will rise, and that could well lead to China selling finished aluminum products to the USA instead of semi-finished products.

In any case, the real problem in China’s aluminum industry is not the subsidies going to smelters. It is the semi-finished sector that is more over-capacity. Some of that over-capacity is supported by government policy – e.g. zero land tax, help with labour costs or local taxes, and the formation of industrial zones with attractive benefits for companies looking to establish a factory in those zones, but the natural structure of aluminium prices in China lends itself to a lower semi-fabricated cost. China wages in semi-fab factories are much lower than in the USA, and China doesn’t pay the inflated delivery premiums that US consumers pay.

Even though primary aluminum is more usually expensive in SHFE than LME, by the time the metal is at the semi-fab stage, the total cost is lower, even after exporting. The contribution from governments to this lower cost is minimal, if you consider only the “additional” help from government over and above the help given by other governments to their local industries around the world.

At the Antaike conference in November, the president of the US Aluminum Association gave a speech calling for cooperation between the two sides on this issue. A WTO action will likely sideline the AA, or force them to abandon these calls and resort to supporting their constituents.

AZ China takes no sides in this fight. But our clients want us to explain the implications and likely outcomes, so that they can make informed decisions about investment or trading.

Contact Paul Adkins at paul.adkins@az-china.com for more information.