Why China just can’t quit producing aluminum, despite a global glut

Aluminum is a perfect reminder that China does not have a market driven economy.

The price of the metal has been seriously weak for the last five years due to a global supply glut, yet China ignores that glut —pumping out a record 1.78 million metric tons in January, according to figures released today—and makes the oversupply worse. Stockpiles of the metals in Chinese warehouses also hit a record high in late February.

In much the same way that the US and Russia lavished cash on their space programs in the 1960s, China since the late 1980s has worked tirelessly to perfect its aluminum production skills. And China’s economic planners like new aluminum smelters because they are mostly coal fired (pdf, p.175) and thus are useful consumers of the black stuff. The Beijing government has pushed for massive development of new coal mines in Xinjiang in Northwest China for example, and the aluminum plants will be natural customers for the mines.

China now has the world’s best aluminum production technology, according to Michael Komesaroff, principal of Australian commodities consultancy Urandaline Investments. But its over production hurts global miners. Rio Tinto has written down the value of Alcan, an aluminum company it bought in 2007, by an estimated $28 billion.

"Aluminum prices won’t do well for the next ten years," says Komesaroff.

So China’s aluminum industry is a great window on how its economic planners think. New smelters create jobs for construction workers, smelter staff and miners, and aluminum gives China’s politicians some world class technology to feel proud of in a nation that is best known for making low value consumer goods. Supply and demand is neither here nor there.World Aluminium Market reported that China has developed from a large aluminium manufacturing country to a primary powerful country. Meanwhile, China is also a large aluminium scarp import country.

Chinese scarp import volume in 2011 was 2.69 million tonnes while export volume was 1200 tonnes. It is predicted that this situation will continue at least until 2030. Beside import, aluminium scarp volume from disassembled imported machines was 600,000 tonnes. So the total imported aluminium scarp volume was 3.3 million tonnes. If the casting yield is 83%, the secondary aluminium is 2.7 million tonnes.

It is not the fastigium of recyclable aluminium scarp. The first peak year is predicted to be 2015. Optimistic forecast showed that the average growth rate in the next 10 years will reach 12%. Output in 2020 will exceed 15.7 million tonnes. But aluminium scarp volume in the country is increasing every year, so imported aluminium volume will decline a lot. Chinese national economy development is at a steady phase with an average DGP growth rate at about 7.5%. Thus secondary aluminium growth rate may less than 10%. If it is 10%, secondary aluminium output will be 13.4 million tonnes.

Secondary aluminium industry is a sunrise industry in China, and secondary aluminium demand exceeds supply now. Till the second half of 2013, demand will continue to increase. 31% growth rate until 2020 was predicted.

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