Chinese overproduction continues to be a threat to the western aluminium producers

According to a recent research, the unexpected advancement in the Chinese aluminium industry has caused noticeable damage to western firms like Rio Tinto.

Rio had acquired the Canadian giant Alcan in 2007 and justified the purchase by the expectation that China would soon stop producing, shutting down unproductive smelters and start importing causing the aluminium prices to improve.

However China instead of ceasing production, stepped up production aided by government subsidies which has causing the total aluminium production to double since 2007, says the former executive of Rio Tinto.

This continued expansion kept the price of the metal low which did not experience a dramatic rise even at the heights of the boom. This has caused Rio Tinto to sell off down two-thirds of its $US38 billion Alcan investment.

Demand for the metal did experience a rise in times of the boom of around 7.2 per cent annually however this rise was quickly swallowed by the voracious production in the Chinese smelters. Subsidies, cuts in electricity meant the Chinese was quick to jump in on the rising demand in the global auto market.

Although electricity costs in China are high, and transportation costs are not promising with most smelter located in the far inlands of the country, with cheap labor and utilizing only about 50% of the plant’s resources, the Chinese manage to continue production.

Chinese engineers have now reached a stage where they can build smelter at one third of the standard international cost with the knowledge and experience they have acquired over the two years. These larger plants, with an average capacity of 400,000 tons allow the producers to spread there fixed costs over the greater output which automatically reduces the per capita cost.