China’s entry into downstream sector indicates changing dynamics of aluminium market

After creating a monopoly in the market for primary aluminium, China aims to venture into the high value added segment for the metal.
 
The most surprising and unexpected step so far was when Chinese aluminum entrepreneur Liu Zhongtian of China Zhongwang announced the acquisition of  Aleris Corp. U.S. for $2.3 billion. The deal gives the owner of Asia’s largest producer of extruded aluminum a smooth access to American and European technology, as well as the market which is dominated by high profile buyers Boeing Co. and automakers such as Audi.



According to Yi Zhu, an analyst at Bloomberg Intelligence from Hong Kong, “This was a different kind of move by a Chinese company.”  “Previously, China went after raw-material assets abroad, but this is about going to the downstream, and it fits with the Chinese government’s goals to upgrade manufacturing and the economy,” he added.
 
China Zhongwang Holdings Ltd has grown over last two decades when the share of Chinese aluminium production has reached 55 per cent from less than 10 per cent. Liu’s move was just a natural progression of the changing market dynamics.
 
Liu is not the only one expanding the downstream business.  While the Chinese smelters continue to produce more and more aluminium, the country is also expanding the rolling mills capacities to produce higher-end products.

China’s exported about 7 per cent of total world demand of rolled sheet and plate in 2015 and according to CRU Group it is going to grow further up. China also produced more than 60 per cent of the world’s aluminum foil in 2015, and last year it became a net exporter of specialized aluminum can sheets.



China will need a few more years to be able to cater to the higher- end market for processed aluminium. To supply to automobile and aerospace industries the products need to pass through very strict norms and China is not well equipped for such specific products. China can either build its own plants with state-of-the-art technology or acquire existing facilities. The Zhongwang group is concentrating on both these strategies.

According to Charlie Durant, a principal analyst from CRU Group in London the Aleris deal “could be the shape of things to come.”

 “Further market integration could ultimately encourage more exports out of China, particularly in higher-value-added rolled products, where Chinese players have yet to have much of an impact,” he added.

To make the Chinese economy more sophisticated and mature by controlling the surplus capacity and encouraging China’s industries to produce more value-added products is the newest strategy of President Xi Jinping to maintain economic growth which plunged badly last years.

“The Chinese government has set clear development goals for the aluminum industry that emphasize not only quantity increase, but more importantly quality improvement,” Zhang Shiping, the chairman of China Hongqiao Group Ltd., said in a statement in August.

According to China Nonferrous Industry Annual demand for aluminium in China will rise 6 million tons by 2018 as more and more aluminium will be used in automobile, construction projects and aircraft. That would be a jump of about 18 per cent.
 
Notably, Zhongwang acquisition of Aleris is the third-biggest investment for Chinese firms in the metal sector. The biggest was Chalco’s $14.2 billion purchase of a stake in Rio Tinto Plc in 2009, followed by Glencore Plc’s sale of the Las Bambas copper project in Peru to MMG Ltd. for $7 billion in 2014.
 
According to Paul Adkins, managing director at AZ China intelligence, a reshuffling of the world’s aluminium supply chain is inevitable when one country controls half of smelting capacity. For him the takeover is “a win for China, a win for Zhongwang, and a win for Aleris.”