Refined Aluminum Industry Suffers From Deficit and Western Investment Accelerates

Under the backdrop of loss of the entire refined aluminum industry, the investment in electrolytic aluminum accelerates. The reporter learnt from a recent survey that, many companies including Shandong Xinfa Group, East Hope Group, China Power Investment Corporation and CHINALCO are making investment in electrolytic aluminum projects in western China. As of the end of last year, the production capacity of ongoing and proposed projects in Xinjiang is as high as 13,050,000 tons, while now China’s total production capacity does not exceed 26,000,000 tons.

“Last year, the capacity utilization rate was less than 70%, indicating serious excess capacity. The expansion of production capacity to western areas of China will undoubtedly bring risks to the industry.” When receiving an interview, Deputy Secretary General of China Nonferrous Metals Industry Association Wang Huajun indicated, at present, the westward movement of electrolytic aluminum production capacity lacks of adequate planning and management, while production capacity exit mechanism in central and eastern China is imperfect and lacks of supervision, which is very likely to further aggravate excess capacity of China’s electrolytic aluminum industry.

“It is so high and fast. The growth of investment in fixed assets of the nonferrous metals industry remains in a high position; especially,that of western China has exceeded the average value of the whole industry.” At the news release concerning China’s nonferrous metals industry which is held recently, Vice Director and Secretary General of the association Jia Mingxing said so when talking about investment growth of the nonferrous metals industry in western China.

According to Jia, fixed-assets investment in the nonferrous metals industry of 12 provinces and autonomous regions of western China rose by 42.9% y-o-y, 8.3% higher than that of the whole country, with a proportion of 43.1% to the total fixed-assets investment in the nonferrous metals industry of China.

“In the past year, China’s overall growth of nonferrous metals investment was higher than that of investment in fixed assets, and the investment showed a clear tendency of westward movement to Xinjiang, Qinghai and Inner Mongolia, etc.” Wang Huajun said to the reporter. He also indicated that the tendency is shown most clearly in the investment in electrolytic aluminum.

Wang Huajun noted that, in 2011, northwest China became the largest producing area of electrolytic aluminum, and its output of electrolytic aluminum exceeded that of central China,with the portion of output reaching 24.2%. “In the next year, the new production capacity(3,900,000 tons) will mainly locate in northwest China. In 2012, China’s new production capacity of electrolytic aluminum is geographically distributed as follows: northwest region accounts for 71%, central China accounts for merely 2.8%, and eastern China accounts for 10.3%, ranking the second in China.” he said.

It is noteworthy that under the backdrop of nonferrous metals investment boom, Xinjiang’electrolytic aluminum investment has entered the phase of “race”. According to statistics of authorities of Xinjiang, as of the end of 2011,Xinjiang’s proposed production capacity of electrolytic aluminum has reached 13,050,000 ton, mainly locating at coal-rich areas such as eastern part of Junggar basin, Yili and Shanshan, etc. Currently, Shandong Xinfa Group,Tianshan Aluminum, Zhonghe Aluminum and China Power Investment Corporation have partly gone into operation. However, more projects still remain in the stage of infrastructure.East Hope, Shenhuo, Qiya and Tianlong Mining are expected to be completed and put into operation in December 2013.

“Previously, most investors that made investment in Xinjiang were private enterprises. But now, state-owned enterprises are also speeding up construction in Xinjiang in recent years.”An insider told the reporter frankly, besides the 13,050,000 tons of electrolytic aluminum production capacity shown in the statistical data,the actual production capacity is likely higher than the figure.

Undoubtedly, what made electrolytic aluminum flood in the western region of China is lowpriced coal resources. A responsible person of a large-scale electrolytic aluminum enterprise in Shihezi city of Xinjiang indicated in an interview, as for energy-intensive industry such as electrolytic aluminum, although Xinjiang has rich and low-priced coal resources, it is restricted by long distance to the main market in China and increase of transportation cost.

At the coal-rich Wucaiwan coal-electric and coal-chemical base at eastern part of Junggar basin of Xinjiang, the leader of a coal chemical enterprise told the reporter, Xinjiang’s coal is very cheap, and the pithead price is less than RMB 100 per ton, while open-cut coal is cheaper, far below the coal price of over RMB 1,000/ton in the mainland market, which is also the biggest reason for Xinjiang to attract electrolytic aluminum enterprises.

He said to the reporter frankly that, after large electrolytic aluminum enterprises such as Shenhuo, Qiya and East Hope made investment in eastern part of Junggar basin, the government provided rich coal resources and build power plants. As a result, one kilowatt-hour only takes the cost of approximately RMB 0.1 yuan. Even if some enterprises purchase electricity from SGCC, one kilowatt-hour is only approximately RMB 0.3 yuan. With the latest electrolytic aluminum technologies, it needs generally only 3 tons of alumina and 15,000 kilowatt-hours to process 1 ton of aluminum ingots. Xinjiang is neither rich in aluminum resources, nor an important market of electrolytic aluminum, but the transportation cost is at most RMB 2,000 per ton. The main cost is electric charge. Calculated as per on-grid power tariff RMB 0.38 per kilowatt hour, it needs more than RMB 5,700 to produce a ton of electrolytic aluminum; Calculated as per RMB 0.15 per kilowatt hour, it needs only RMB 2,200, while the current price of electrolytic aluminum is RMB 15,000 per ton. Therefore, the profit is considerable.

The reporter learnt that, in order to restrain the risk of excess capacity brought by blind expansion of the electrolytic aluminum industry, in April last year, 9 ministries and commissions including MIIT jointly issued a document to halt all proposed projects related to electrolytic aluminum, and required local governments to call off preferential policies for the industry. At that time, Xinjiang, deemed a powerhouse of electrolytic aluminum, was not included. However, at present, the rapid increase of production capacity as a result of electrolytic aluminum enterprises’ massive investment in Xinjiang has sparked concerns and questions from insiders.

“The association has reported the situation to relevant departments for many times with the purpose of attracting attention.” Wang Huajun told the reporter. He revealed that the current electrolytic aluminum construction boom in west China has raised vigilance of the industry,and the association also expostulated about unordered expansion of production capacity in the forms of report, etc.

The reporter learnt from another official of the association that, the association has stated at the meetings of MIIT and NDRC that “the rapid expansion of electrolytic aluminum production capacity of western China will aggravate the problem of industrial surplus”.

The person abovementioned said frankly to the reporter that, in terms of formulation of national policy, we should strictly control investment in energy-intensive industries including electrolytic aluminum and encourage the nonferrous metals industry to move to west China.However, at present, the majority of electrolytic aluminum production capacity in Xinjiang are newly invested, rather than “transferred”after elimination of backward production capacity, which has worsened the situation of the electrolytic aluminum industry that is restricted by excess capacity and inadequate operating rate.

Due to inadequate operating rate as a result of excess capacity, China’s total production capacity of electrolytic aluminum stands at 26,000,000 tons. Relevant statistics show that,China’s electrolytic aluminum output stood at 16,133,000 tons and 17,807,000 tons in 2010 and 2011 respectively. According to the estimates of Qilu Securities, in February 2012,China’s capacity utilization rate of electrolytic aluminum was 81.5%, while that of alumina was 82.1%, down 3% and 6.5% respectively compared with that in December 2011.

“Under the circumstance of inadequate operating rate, such a great increase of production capacity will doubtlessly aggravate excess capacity of the whole industry, which will cause very serious problems to the entire industry.”an insider of CHINALCO told the reporter. In his view, “production capacity increase” without corresponding “elimination” intensifies environmental pressure in western China. Moreover, as for the electrolytic aluminum industry,rapid expansion of production capacity will surely result in industrial surplus and price decline and thus it is hard to reverse the loss situation of the whole industry.

Now, it is a traditional peak season for the electrolytic aluminum industry, but downstream demand has not been improved. Plus the factors of excess capacity and cost increase, etc., the electrolytic aluminum industry remains in deficit on an all-round basis. The reporter learnt that the average price of crude aluminum stood at approximately RMB 17,000 yuan/ton last year. Most electrolytic aluminum enterprises do not make a profit or at most breaks even. While in 2012, aluminum price dropped to approximately RMB 16,000 per ton, and most enterprises have begun to lose money.

Several insiders who have accepted interviews appeal that China shall work out a national plan for electrolytic aluminum production capacity.On one hand, under the plan, we should reasonably deploy the progress of electrolytic aluminum production capacity, strengthen industrial management. On the other hand, we should establish and improve production capacity exit mechanism in central and eastern China, and carry out effective supervision, so as to limit the total electrolytic aluminum production capacity within a reasonable scope.

“Local governments promote enterprises to accelerate expansion behind the scenes.” Zhang Xiaode, Professor in economics of Chinese Academy of Governance, said in an interview.On one hand, since western China has great cost advantage, the expansion brought many benefits to relevant enterprises. On the other hand, since local governments eagerly go after GDP growth, industries such as electrolytic aluminum that makes great contributions to GDP are very popular for investment attraction of local governments. Zhang Xiaode emphasized that, although westward transfer is a good thing, it also reduces costs. Moreover, China encourages electrolytic aluminum enterprises to move to the western region. However, enterprises that have already made investment in eastern China are reluctant to make investment in western China, thus causing great repetition of production capacity.

“ Besides aggravating excess capacity,whether the transportation condition in western China can satisfy sharply increasing production capacity still remains unknown.” Wang Huajun’s worry is not baseless since Xinjiang has only Lanzhou-Xinjiang railway leading to the mainland market.

As for control of total production, Wang Huajun indicated that the electrolytic aluminum industry always has the problem of excess capacity since there is no perfect exit mechanism in China. Under such a backdrop, electrolytic aluminums accelerate to expand in western China while keep operating in central and eastern China, thus causing further excess capacity.Therefore, in the process of expansion in western China, whether central and eastern China can exit in a timely manner is the key for the development of the industry.

As for the impact of the industrial surplus on the industry, Liang Huanlei said that, without effective planning and design of the electrolytic aluminum industry that has been suffering from excess capacity, if central and eastern China do not gradually exit (or at least partly exit) the industry with the expansion in western China,it will intensify domestic competitions and drive down the price and profit, thus affecting export price of China and going against longterm development of the industry.

Zhang Xiaode considers that the control of total production and improvement of management efficiency of nonferrous metals is the key for the development of the industry. He suggests that under the condition of controlled total production, we should improve industrial access standard, improve industrial exit mechanism and create a good market environment for the industry. Liu Min, an analyst for nonferrous metals industry, indicated that market is better than policy guidance. Market-oriented price leverage is the best guidance for the industry,and market changes will truly turn industrial transfer into reality.