Global aluminium industry is buzzing about China; the most sought-after hub for the light metal. There is a lot of discussion about Chinese aluminium industry and its trends at nearly every industry meet that happened in the year gone by. The general question has been – why China continues to add new capacities despite global oversupply and reigning low price combined with ever increasing cost of production. Blame it or praise it, the aluminium biggies unanimously agree that China is now the hub of the global aluminium industry. Today China is the largest producer and consumer of aluminium and over last decade, it has also recorded the largest growth within both.
Accounting for one-third of world production and consumption of primary aluminium Chinese Aluminium industry has now emerged as the major arena of industry research. As per Roskill Information Services, in 2012, China accounted for about 44% of the total world primary aluminium production. International Aluminium Institute has confirmed that the World aluminium production is 45mt and Chinese aluminium production is about 20mt in 2012. In the last ten years, China has quadrupled its consumption of aluminum and in 2012 China’s aluminum consumption was around 21.7 million tonnes. Already accounting for 42% of global aluminium consumption, China is forecast to boost this share to 52% by 2025. (Source: RUSAL)
There are several factors that contribute to the Chinese growth in aluminium consumption:
- General growth and urbanization in China results in a higher per capita consumption
- Goals and strategies of the Chinese Government has resulted in investments in infrastructure and housing which also consume large amounts of aluminum. Building and construction sector consumes 33% of the total aluminium consumption.
- Finally, the continued strong position of China as a producer of industrial and consumer goods for export result in large investments in the aluminum industry.
According to SMM statistics, in 2012, its total aluminum smelting capacity was 27.1 million mt and the actual production was of the order of 21.89 million tons. One of the reasons for this high production rate is its lower cost of production, especially compared to western countries. For example, Northwest China has become the largest aluminum production region in China mainly due to bulk availability of low cost energy. On top of that, Chinese Government has declared electricity subsidy for all major smelters in China so that their capacity does not get affected by low aluminium price. More than 10 million mt/year new aluminum capacities are planned to be built in Xinjiang during 2013-14.
In China the aluminum industry is heavily supported by society at large and the Chinese Government. Paul Adkins, the MD of AZ China has recently highlighted a few reasons why China is persistent on producing aluminium. Government subsidies are taking as much as $200 per tonne off the cost of production. Chinese Governments subsidize the local industry in order to protect jobs, and to maintain a level of “social order”. But the market also drops the price as soon as the news leaks out and makes the capacity unprofitable. Despite the high cost of production, low price and environmental hazards, China is continuing with high production and new capacity is being added year by year. According to Mr. ADKINS it is convenient to expand capacity in China as there are relatively low barriers to enter the industry, high incentives for moving down the cost curve and good regional incentives on energy cost.
Other than these, there is also a strategic need to increase capacity:
- Additional 350 million people move to cities
- 1 million kms new road
- 28,000 kms of metro rail (much underground)
- 170 mass transit systems
- 50,000 new skyscrapers (2 Chicagos per year)
- 97 new airports
- 1000GW new coal power capacity
As a policy, government does not promote import as it aims to:
- add value to domestic products
- avoid financial penalty to import: Estimated US$60bn per year and growing
- prevent Jobs loss
- avoid geopolitical risk
Aluminum inventories in trading markets in Shanghai, Wuxi, Hangzhou and Nanhai have now approached 1 million mt from 450,000 mt early this year, which has weighed down domestic aluminum price to a considerable extent. But, for the Chinese government, aluminium is an important channel for development, urbanization and modernization and subsidies are means to prevent the industry from incurring loss.
China aluminum stocks have increased 1.5 times since the beginning of 2012, but the falling metal price on SHFE has made 30% of China capacity unprofitable. Notwithstanding the loss, new capacities have been commissioned in the Western region of China and Shandong respectively. Government is providing power subsidies in central provinces to support loss-making smelters so that production could continue. With the help of cheaper electric power, China plans to replace outdated capacities in the Central provinces with new ones in the Western provinces.
While China is self-sufficient in aluminium and is approaching self-sufficiency in alumina, dependence on imported bauxite remains high, despite rising output. Due to power-supply issues, import duties on raw materials and high costs of production, if China is not able to keep up its self-sufficiency in future, it may become a stable importer of primary aluminium. China’s aluminium consumption is already predicted to double by 2020. Alcoa sees aluminium demand to be boosted by Chinese construction, beverage and transport sector. Rusal also expects China to remain the largest growing market in the coming year, with a growth of 9.5 per cent. Australia has accused Chinese producers of oversupplying the world market with subsidised aluminium. But, it is also the fact that China consumes more aluminium than it produces. The Chinese domestic production, which has been growing by 9.8% per year, is behind the local consumption growth, estimated at 12.9% per year. So, here is a strong possibility that there will be a constant increase in import. By 2015, the import of aluminium to China is expected to increase by more than 25 times, reaching 3-4 million tonnes. It does turns out to be a strong ray of hope for the major aluminium producers in the world who are facing losses and closure threats due to low metal price and high cost of production since the economic meltdown of 2008-09.