Western aluminium makers face new threat

Western aluminium makers face new threat

Chinese producers of the lightweight metal push to supply automotive and aerospace industries

Western aluminium makers face new threat©FT Graphic / Bloomberg

Aluminium smelting inside a China Hongqiao factory in Zouping, Shandong province

China Hongqiao, the world’s largest producer of aluminium by output, used its latest annual report to warn that fierce competition in its home market would lead to “survival of the fittest”.

At the vanguard of China’s dominance of the global aluminium industry, Hongqiao appears to be thriving: in March the privately owned company set out plans to expand production capacity to 6m tonnes by the end of this year — 33 per cent more than the combined output of its US rivals in 2015.

These ambitious plans help explain why US and European aluminium producers fear their Chinese competitors could undermine a tentative recovery in the price of the lightweight metal this year. This is because western producers say excess production by Chinese rivals was a key factor behind falling prices between 2011 and last year.

Any fresh deterioration in the aluminium market — the rebound has been attributed to a limited increase in demand allied to some cuts in production in certain countries including China — would have significant repercussions for producers including Alcoa of the US, Norway’s Norsk Hydro and Russia’s Rusal.

Furthermore, Chinese producers are set to become even more potent competitors by pushing into production of high quality aluminium for industries including aerospace and automotive. This area has so far been dominated by European and US producers.

Jeremy Wrathall, analyst at Investec in London, suggests European and US aluminium producers are under severe pressure. “Does the west want an aluminium industry or not?,” he asks. “They’ve got to make a decision if it’s of strategic importance or not.”

Western aluminium makers face new threat

The high stakes were highlighted by how President Barack Obama discussed the issue of excess aluminium production by China with President Xi Jinping at a meeting of leaders of the G20 group of nations this month.

“The US and China recognise that due to a weak global economic recovery and depressed market demand, the excess capacity of the . . . aluminium industry has increased and become a global issue requiring collective response,” said a White House statement.

China overtook the US in aluminium production in 2003, and now, globally, produces half of the metal.

Most of China’s production of primary aluminium — the basic, unworked metal — is consumed domestically due to an export tax levied because of the high energy costs of smelting.

Companies such as Hongqiao deliver the metal in liquid form or cast ingots to Chinese customers that turn it into so-called semi-finished products. These include rolled products, such as aluminium sheet used to make drinks cans, and extruded items like girders for the construction industry.

China’s exports of these products have soared over the past decade, reflecting how production far exceeds domestic demand.

Western aluminium makers face new threat

Little wonder that European aluminium producers are worried about China’s output, and the impact on prices.

“Our concern is one word: overcapacity,” says Maximo Miccinilli, director of public affairs at European Aluminium, which represents the region’s producers. It estimates that China has excess aluminium capacity of 10m tonnes a year currently — five times the EU’s total output.

“In the last 10 years [Europe has] lost one-third of our capacity,” adds Mr Miccinilli. “We had to shut down smelters in Europe and of those that are still operating, most are under serious risk.”

Similar concerns exist in the US, where the aluminium industry has been in steady decline since the financial crisis. Production fell to its lowest level in more than 30 years in June.

Western aluminium producers complain of unfair trade, alleging that some Chinese rivals receive subsidies for electricity costs — the largest single expense in smelting. They also claim Chinese producers are dumping aluminium on the global market at lowball prices.

The China Nonferrous Metals Industry Association, which represents Chinese aluminium producers, declines to comment on these allegations.

Western aluminium makers face new threat

Western producers now face an additional challenge: Chinese rivals’ ambitions to expand into making higher quality aluminium products for use in aircraft and cars.

“What China lacks is high-value added aluminium products for aviation,” says Laura Zhai, analyst at Fitch. “All Chinese companies would want to get a hold of that.”

A company affiliated to China Zhongwang, the world’s second-largest producer of aluminium extrusions, last month agreed to buy Aleris of the US for $2.3bn including debt.

Aleris specialises in rolled aluminium products for the aerospace and automotive industries, and the takeover “raises very serious concerns for the entire aluminium industry”, says the Aluminum Extruders Council, which represents US producers.

“Zhongwang is a state-supported enterprise and has received large benefits and financing from the government of China,” it adds.

But Lu Changqing, president of Zhongwang, says it has always been a private company and has not received any direct or intermediate investment from the Chinese state.

“Zhongwang . . . has grown up and developed in a completely market-based process, and in this process, the company has had not special government support and has had no subsidies,” adds Mr Lu.

Western aluminium makers face new threat

Yet Zhongwang’s takeover of Aleris could lead other Chinese aluminium companies, both state and privately owned, to hunt for overseas assets, say analysts.

“Chinese aluminium companies are looking outside China,” says Charlie Durant, analyst at CRU, a consultancy.

One potential source of relief for western aluminium producers are signs since late last year the Chinese government is willing to tackle excess capacity in the domestic industry.

Some analysts question Beijing’s commitment, but so far this year Chinese aluminium output has fallen by an estimated 3 per cent compared to 2015.

Zhang Bo, Hongqiao’s chief executive, said in March the company would slow its capacity expansion or even suspend output of basic aluminium if demand faltered. However, since many Chinese aluminium producers focused on semi-finished products are privately owned, it could be difficult to control the country’s output of the metal, says Paul Adkins, founder of AZ China, a consultancy.

“The opportunity for [Chinese industry] leadership and co-ordinated efforts to control overcapacity [in semi-finished products] is extremely limited,” he adds.

Additional reporting by Lucy Hornby and Luna Lin in Beijing

Carmakers start switching to aluminium

In November 2014, the manager of Ford’s Dearborn plant near Detroit drove the first aluminium-bodied F150 pick-up truck off the production line. It was a watershed moment for the lightweight metal that is challenging steel’s dominance in the automotive industry.

Carmakers in Europe and the US are turning to aluminium as they seek to make their vehicles lighter to meet fuel efficiency regulations. Companies such as Tesla use the metal to offset the bulk of lithium-ion batteries in electric cars.

Aluminium is one-third the weight of steel, more malleable, and resistant to corrosion, although it is more expensive and typically not as strong. While the global aluminium market is far smaller than steel — just 58 million tonnes of the former metal were made last year, compared to 1.6 billion tonnes of the latter — analysts see significant growth potential.

Global production will increase by a 3.2 per cent each year between 2015 and 2020, according to CRU, a consultancy. That contrasts with a 1.4 per cent growth forecast for basic steel, although the figure would be 3.1 per cent if China is excluded.

The use of aluminium alloy in a car’s main structure, which includes the doors, bonnet and side panels, will rise by 17.5 per cent each year between 2015 and 2025, say Goldman Sachs analysts.

But in both the automotive and aerospace sectors, aluminium faces competition from carbon fibre-reinforced plastic, which while expensive now is seen as an important material of the future for manufacturers of aircraft and cars.

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BDC 285 October 2021

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