(Minews) - A surge in aluminum exports from China is altering market dynamics for one of the world’s most heavily traded commodities. Because of quirks in China’s tax system, the trend involves reshaping the metal itself.
Aluminum prices on the Shanghai futures exchange have dropped 8% in the last year to $2,081 a ton amid a sharp rise in supply, compared with a 4% increase in aluminum prices on the London Metal Exchange.
But Chinese aluminum exports seem unattractive because the government applies a 15% export tax on each ton sold overseas, a measure that is designed to keep more output at home.
In practice, Chinese smelters are getting around the charge by masking their aluminum exports as semifinished products, known as “semis,” analysts say. “Primary” aluminum is normally produced in ingots, but the metal can be relatively easily changed into forms that look like products such as door frames or hubcaps. Once exported, these semis can be remelted and recast into desired forms in the destination countries.
Chinese producers benefit from a 13% value-added-tax rebate on semifinished aluminum products. Once premiums paid by buyers on aluminum bought on the LME are taken into account, that can make Chinese aluminum more competitive with metal produced in other countries.
“There has been a surge in semifinished products exports,” said Uday Patel, principal aluminum analyst at Wood Mackenzie Ltd. “Some of this is simply primary metal masquerading as semis.”
While it is hard to know what proportion of China’s aluminum exports are semifinished output, sales of aluminum and aluminum products abroad totaled 488,000 tons in December, according to data from Citigroup Inc. That was a 136% rise compared with exports in January last year.
More Chinese aluminum producers are building processing facilities that could transform the metal into semifinished products, according to Mr. Patel, meaning China’s aluminum exports could stay high this year.
China’s aluminum output jumped by 14% to a record 28.3 million tons in 2014, partly because of a surge in prices early in the year that led to higher output.
Subsidies offered by four major industrial provinces on power costs also helped encourage smelters to produce more aluminum, a process that requires a great deal of electricity.
Domestic Chinese demand for aluminum hasn’t kept pace, however, mainly because of problems in China’s property sector that have led to weaker demand growth for metals needed in infrastructure. In turn, that has led Chinese smelters to look to sell more abroad.
The rising tide of Chinese exports has channeled more aluminum into Asia, forcing down the premiums paid by buyers in the region for immediate deliveries.
The Japan three-month aluminum premium—considered a benchmark in the Asian market—is around $425 a ton, compared with European premiums of $470 a ton and U.S. premiums of $522 a ton, according to Laura Page, an analyst at CRU Group, which provides research on the metals, mining and fertilizer industries.
Premiums in Singapore and South Korea are still lower, at $310 a ton and $375 a ton, respectively.
“Chinese production definitely has an impact on the Asia ex-China market, which has become quite weak,” said Ivan Szpakowski, a Hong Kong-based analyst at Citigroup.
Other aluminum producers in the region, such as Malaysia and Australia, which have in the past exported mostly to Asia, have been diverting some cargoes elsewhere, he said.
Australia, one of the largest exporters in the Asian region, is already shipping fewer cargoes of the refined metal than in past years because the country’s production has fallen after smelter closures.
The Australian government says the industry still faces headwinds from overcapacity in China, and tapering growth in demand.
“The abundance of spare capacity in China that can respond quickly to higher prices will moderate any price recovery,” the government’s chief economist said in a recent report.
Chinese exports should help alleviate shortfalls in production in countries such as the U.S. And should growth in China’s demand flatten further, the supply glut from the nation’s relentless production increases could last for years.
“This would not only put severe downward pressure on the premium, but would take inventory volumes to a level which might take a decade to run down to normal,” said Macquarie Group Ltd. in a note to its clients.
