China can build an Aluminium plant for a 1/3rd of the cost of competitors in the west.
Bad call on China aluminium industry hits Western
Western firms, Rio Tinto in particular, have been damaged by underestimating the cost and technological advantages of China’s aluminium industry, according to new research published today by a leading expert on Chinese resources.
Rio partially justified its purchase of Canadian giant Alcan in 2007 on the expectation, says Australian Michael Komesaroff, that China would soon cease producing aluminium and would instead start importing, resulting in a higher price.
However, says the former executive of Rio Tinto and of a major Chinese resources corporation, in new research for Beijing and Hong Kong-based Gavekal Dragonomics, “rather than shut capacity China continued to expand, and today its aluminium production is twice the size it was in 2007”.
This continued expansion, he says, has kept aluminium prices depressed and has forced Rio to write down two-thirds of its $US38 billion Alcan investment.
Chinese smelters have boosted their comparative efficiency to a degree that has surprised competitors — despite Chinese aluminium giant Chalco being Rio’s largest single shareholder.
And, says Mr Komesaroff, Western industry players, also including US giant Alcoa, who “have long believed that China’s enormous expansion of aluminium capacity defies economic logic … misunderstand how industrial policy drives China’s decision-making”.
He says aluminium is the single exception to the big picture of the commodity super-cycle being finished — because its price never rose strongly during the heights of the boom.
Demand did grow during the super-cycle, up an average annual 7.2 per cent over the past five years. But China met most of that demand itself, through massive investment in smelters.
“China’s local government-driven investments set new standards for excess,” says Mr Komesaroff.
Thus 90 per cent of the growth in production worldwide has happened in China in the past decade — so that the country now produces half the total global supply.
The extent of this boosted capacity will, he anticipates, “put pressure on the rest of the global aluminium industry to restructure and consolidate to survive”.
But Paul Adkins, managing director of Beijing-based aluminium-focused consultancy AZ China, points out that an increasing amount of smelting capacity is shifting far inland, especially to Xinjiang and Inner Mongolia regions in the northwest, “some 2000km from the nearest major port.”
And the industry’s focus is on meeting domestic demand.
Falling coal costs and increasing subsidies by local governments are lowering electricity costs, Mr Adkins says.
And “capital is not a problem in China”, he says, suggesting that with Chinese rolling mills at only 50 per cent utilisation, “there’s no time like the present to start gearing up to penetrate the US auto market”.
Analysts have long argued, says Mr Komesaroff, that since energy accounts for about 40 per cent of the production cost of aluminium, it makes no commercial sense for China, with relatively high-cost electricity, to produce so much — encouraging global producers like Alcoa and Rio to expand.
However, he says that Chinese engineers can now, with their considerable experience building smelters over two decades, construct a new plant for only a third of the standard international cost.
Such plants are also among the largest, averaging 400,000 tonnes per year — 45 per cent above the average elsewhere in the world, allowing the Chinese smelters to spread their fixed costs over greater output, lowering average production costs.
Yet Chalco has made losses for two of the past three years, which threatens to continue.
So failing a shake-out of excess Chinese capacity, it has formed a coalition with 11 other smelting firms in China, aiming to support prices by selling directly to customers rather than to the Shanghai Futures Exchange.
Bad call on China aluminium industry hits Western
Western firms, Rio Tinto in particular, have been damaged by underestimating the cost and technological advantages of China’s aluminium industry, according to new research published today by a leading expert on Chinese resources.
Rio partially justified its purchase of Canadian giant Alcan in 2007 on the expectation, says Australian Michael Komesaroff, that China would soon cease producing aluminium and would instead start importing, resulting in a higher price.
However, says the former executive of Rio Tinto and of a major Chinese resources corporation, in new research for Beijing and Hong Kong-based Gavekal Dragonomics, “rather than shut capacity China continued to expand, and today its aluminium production is twice the size it was in 2007”.
This continued expansion, he says, has kept aluminium prices depressed and has forced Rio to write down two-thirds of its $US38 billion Alcan investment.
Chinese smelters have boosted their comparative efficiency to a degree that has surprised competitors — despite Chinese aluminium giant Chalco being Rio’s largest single shareholder.
And, says Mr Komesaroff, Western industry players, also including US giant Alcoa, who “have long believed that China’s enormous expansion of aluminium capacity defies economic logic … misunderstand how industrial policy drives China’s decision-making”.
He says aluminium is the single exception to the big picture of the commodity super-cycle being finished — because its price never rose strongly during the heights of the boom.
Demand did grow during the super-cycle, up an average annual 7.2 per cent over the past five years. But China met most of that demand itself, through massive investment in smelters.
“China’s local government-driven investments set new standards for excess,” says Mr Komesaroff.
Thus 90 per cent of the growth in production worldwide has happened in China in the past decade — so that the country now produces half the total global supply.
The extent of this boosted capacity will, he anticipates, “put pressure on the rest of the global aluminium industry to restructure and consolidate to survive”.
But Paul Adkins, managing director of Beijing-based aluminium-focused consultancy AZ China, points out that an increasing amount of smelting capacity is shifting far inland, especially to Xinjiang and Inner Mongolia regions in the northwest, “some 2000km from the nearest major port.”
And the industry’s focus is on meeting domestic demand.
Falling coal costs and increasing subsidies by local governments are lowering electricity costs, Mr Adkins says.
And “capital is not a problem in China”, he says, suggesting that with Chinese rolling mills at only 50 per cent utilisation, “there’s no time like the present to start gearing up to penetrate the US auto market”.
Analysts have long argued, says Mr Komesaroff, that since energy accounts for about 40 per cent of the production cost of aluminium, it makes no commercial sense for China, with relatively high-cost electricity, to produce so much — encouraging global producers like Alcoa and Rio to expand.
However, he says that Chinese engineers can now, with their considerable experience building smelters over two decades, construct a new plant for only a third of the standard international cost.
Such plants are also among the largest, averaging 400,000 tonnes per year — 45 per cent above the average elsewhere in the world, allowing the Chinese smelters to spread their fixed costs over greater output, lowering average production costs.
Yet Chalco has made losses for two of the past three years, which threatens to continue.
So failing a shake-out of excess Chinese capacity, it has formed a coalition with 11 other smelting firms in China, aiming to support prices by selling directly to customers rather than to the Shanghai Futures Exchange.
