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US scrutiny, market fears take shine off China aluminum

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Aluminum ingots are piled up at a bonded storage area at the Dagang Terminal of Qingdao Port, in Shandong province, China.   © Reuters

BANGKOK -- A U.S. trade investigation into aluminum pricing will shine another spotlight on China's massive production of the metal when it hears from senior Chinese industry officials in Washington on Sep. 29. The hearings, by the U.S. International Trade Commission, underscore fears among international aluminum producers and users of China's market dominance.

In the past year, the combination of a multi-year global slide in commodity prices, China's industrial overcapacity, a move by Chinese producers toward higher-end products, and allegations of dumping have threatened to upset a delicate global market balance and a recent recovery in aluminum prices.

China has effectively maintained a parallel aluminum market for decades but continued growth in its already world-leading refining and smelting capacity has seen its production increasingly weigh on the global market.

While there have been reports that Beijing has considered lifting or cutting a 15% export tax on the raw, smelted metal, it has yet to do so, and meanwhile maintains a value-added tax rebate on semi-finished aluminum product.

"Aluminum [is] a finely balanced metal market, on track for a 3% lift in demand growth in 2016 [from 2015]," analysts at investment bank Morgan Stanley wrote in a Sept. 12 client note.

Aluminum, which is manufactured from bauxite through refining and smelting, is the world's most popular non-ferrous metal due to its high conductivity, strength, flexibility and light weight. Its properties have made it a suitable substitute for iron and steel in construction and it is increasingly being used in vehicles and aircraft because its lightness weight reduces fuel consumption.

The metal's price has gradually recovered this year, closing at $1,637 per metric ton for cash settlement on the London Metal Exchange on Sept. 23, a rise of about 11% from the start of 2016, after falling by 19% during 2015.

Even so, aluminum overproduction in China, which accounts for more than half of global supply, has caused fresh concerns in the industry, despite some recent production cuts.

Paul Adkins at Hong Kong-based aluminum consultancy AZ China, estimated that total Chinese production will rise to 33-34 million tons this year, an increase of 7%-8% from last year.

He added that China often maintained significant levels of subsidies and support for aluminum producers at provincial and local levels.

Dumping probe

In response to pressure from U.S. aluminum producers who fear cut-rate Chinese exports, the U.S. International Trade Commission in April launched an investigation of competitive factors affecting aluminum production in major producing countries, including the U.S. and China. Officials from the China Nonferrous Metals Industry Association as well as representatives from some aluminum fabricators are expected to attend hearings in Washington from Sept. 29, but the probe is not expected to be completed until mid-2017.

One Chinese company coming under particular pressure is China Zhongwang Holdings, Asia's largest producer of industrial aluminum extrusion products such as rolled sheet for beer cans and construction girders. U.S. aluminum producers have accused it of sending semi-fabricated products to other countries, such as Mexico, to be remelted into aluminum ingots.

These ingots are used as a store of value, similar to other base meals such as copper and nickel, and are traded as physical commodities, futures contracts and other derivatives that affect metal prices beyond the simple supply and demand equation.

If processed or semi-processed aluminum is exported from China, producers avoid the 15% export tax on the unprocessed metal. They also receive a rebate of 13% to 15% covering nearly all of the 17% value-added tax applied to the products domestically, a typical type of rebate applied by governments around the world.

Not only does this encourage exports, it alters the shape of the export trade. This reflects the fact that aluminum is being shipped out of China for two reasons: to sell excess supplies not needed in China, and as a way for wealthy Chinese to get money out of the country to avoid tight capital controls, Adkins said.

Adkins noted that Zhongwang has been accused of using such exports to transfer money out of the country, although Chinese officials have denied this.

Price stabilization?

While the rise in Chinese exports is causing fears in the U.S. and Europe of a further slide in aluminum prices, other observers are more confident that the metal has now found a stable price of between $1,600 and $1,700 that it can sustain into next year.

"The aluminum market has in fact found its stabilization point this year for the first time in five years," Oleg Mukhamedshin, deputy chief executive of Russia's UC RUSAL, the world's second largest aluminum producer, told a recent international investment conference in Moscow.

Even so, the broader outlook for the metal remains cloudy.

"Low costs of capital and access to cheap power in China and the Middle East have seen rapid capacity growth, which we expect should continue to lower and flatten the global cost curve," said analysts at UBS investment bank in a recent note. They forecast structural surpluses beyond 2017, driven by unconstrained supply growth in China, India and the Middle East.

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