China’s semis exports - what next?

After growing by 20% last year, China’s exports of semi-finished aluminium continues unabated. But is the tide turning?

It’s a high risk play, but some willing entrepreneurs in China have found a way to move surplus metal out of the country, and pocket hefty profits along the way. The combination of LME prices plus the delivery premium, along with low Shanghai prices and a refund of VAT, have opened a sufficient gap to generate margins of as much as 30%.

But conditions are changing. The LME remains below US$1800/t, and the surplus metal already exported is weighing on delivery premiums. As well, there is talk that the Chinese government is looking at discontinuing the practice of refunding exporters their VAT. Recently, Rusal has been kicking up the sand, lobbying various government bodies around the world to bring attention to the size of the practice and its implications for local markets, employment levels and so on.

If Beijing were to take some form of action, either due to Rusal’s lobbying or due to other drivers, chances are it will hurt those who are genuine buyers and consumers. There are countless companies in the US and elsewhere who can source raw materials from China cheaper than from local markets, where the metal price and mid-west premium make traditional suppliers too expensive.

This is the kind of trade that could turn off as quickly as it started. Assuming a shipping container full of metal needs 3 -4 weeks to transit to its destination port in the US or Europe, it means that metal flow would stop about 2 months after any decisive action.

We don’t have any inside knowledge as to when these exports might stop, but we have been saying all along that the whole business is opportunistic. Opportunities come and go, risks rise and fall - players can leave the table at any time.

We carried a detailed analysis of this situation in last month’s World Aluminium Monthly, and we are planning to report on it some more in the upcoming issue. In particular we will be focusing on Chalco’s response to the metal export situation, especially in light of their recently-formed cartel… oops, I meant consortium.

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