Producers focused on expansion despite China’s promise to check excess aluminium capacity

After the recently concluded bilateral dialogue between the U.S. and China during the G-20 Summit, both U.S. and China decided to work collectively to address the aluminium excess capacity issue.

Chinese leaders promised to check excessive aluminium production that is flooding global markets and compelling smelters in U.S. and Europe closing capacity due to unfair competition from cheap products.  However, aluminium producers in China seem to have another plan.

A number of finished and semi-finished product manufacturers have mushroomed in China over last one decade contributing to the aluminium glut.  The situation is made worse by the slow growth of Chinese Economy in last few years. While the U.S. and European smelters are closing due to the excess capacity, it has made aluminium cheaper for the downstream buyers from West who manufacture products to supply to the automotive, aerospace and packaging sector. Aluminium producers from the West are demanding trade penalties.



Though the Chinese Communist leadership has been trying to cut overcapacity and reduce reliance on energy intensive industries, they face resistance from local officials who are against cutting jobs and losing revenues.

The government is bound by their commitments to the producers and they have not really been able to form a structured plan about how to cut the excess capacity as promised during the G20 summit. Western counterparts in the industry have been accusing the Chinese government of providing unfair energy and tax subsidies to the aluminium producers.

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Despite that, Chinese smelters that make more than half the world's aluminium are adding millions of tons of capacity. Output in June hit a monthly record of 2.7 million tons, according to the Aluminium Institute in London. The capacity started falling in the month of July and August but it has started rising again after Chinese smelters restarted close capacities.

"The industry overcapacity situation is more severe," said the newspaper National Business Daily this month.

Chinese producers however, disagree on that.

"We believe that if there is an overcapacity in the aluminium industry, then it must be temporary," said Mo Xinda, a researcher for the aluminium branch of the China Nonferrous Metals Industry Association.

Till date Chinese steel exports were drawing international attention but, now the pressure to take up official action against aluminium export from China is rising. The Aluminum Association, a U.S. industry group, appealed to U.S. authorities in April to investigate Chinese producers.

Aluminium producers in Europe and U.S. say its industry is being driven out of business by subsidized Chinese exports.

The global price of aluminium has dropped by 40 per cent since 2011 and sits at about $1,600 per ton after dipping below $1,500 last year. That is too low a price for aluminium producers outside China to stay profitable.

Aluminium producers in China like Tianshan Aluminium Co. East Hope Group in Shanghai, and China Resources Co., a national-level state company owned by the Cabinet have revealed their plans to expand capacity in near term.

Treasury Secretary Jacob Lew pressed Chinese officials to control capacity at an economic dialogue in June and during the G20 meetings. Sources say that Chinese officials have no plans to force the closure of aluminium capacity because they used up their "political capital" on coal and steel.

And while they are closing smelters in central and southern China due to higher fuel and labour costs it is being offset by newly opened capacities in the north, where there is abundant coal supply. This undue dependence on high-sulfur coal is also raising environmental warnings across the globe.