CORAL GABLES, Fla. State-owned entities account for a significant amount of global primary aluminum production, leading to market distortions downstream, according to a trade attorney.
State-owned companies dont make decisions based on market forces but insteadparticularly in Chinaprioritize goals such as employment, Robert E. DeFrancesco III, partner at Washington-based law firm Wiley Rein LLP, said March 19 at the Aluminum Extruders Councils annual meeting in Coral Gables.
We see factors at play in their decisions as to investments and expansions in capacity that do not relate in any way to demand forces, he said. This obviously has a distortive effect on trade flows both at the level of production where they are and downstream products.
Primary aluminum production has shifted away from countries where there is less state ownership to Brazil, Russia, India and China (the so-called Bric nations), where much of the production is controlled by the state, DeFrancesco said. Its an overwhelming majority of overall capacity.
While primary aluminum production outside China fell about 1.3 million tonnes in 2013, it jumped roughly 3.4 million tonnes in China, which now accounts for 50 percent of global output, DeFrancesco said.
There is very little relationship to demand, he said. The only interest in China is to keep these companies running, to keep (people) employed and to keep expanding capacity.
The result is that capacity grows even while prices decline, a pattern that has been repeated not only in the aluminum industry but in the solar-panel sector as well, DeFrancesco said. Another result is zombie companies that by Western standards would have been bankrupt long ago but are propped up by either federal or provincial governments and continue to produce material and employ workers.
Other governments have increased state ownership in response to China, DeFrancesco said. Faced with this massive expansion of capacity by the Chinese government, they have to reactand they are expanding, not shrinking, capacity, and continuing to push into other markets.
Unlike other countries, the vast majority of Chinas primary aluminum, while produced by state entities, is not directly exported, DeFrancesco said. Very little of it actually leaves China. It leaves China in the form of an extrusion, a wheel or an engine.
But downstream production is impacted by Chinas state ownership of primary aluminum producers, DeFrancesco said, because the prices provided to downstream companies are distorted relative to the world market, and tax incentives only serve to further boost downstream exports.
In the extrusion world, a primary producer must pay a 15- to 18-percent value-added tax (VAT) on the sale of aluminum to an extruder, DeFrancesco said. The extruder then claims a VAT rebate on export of the product. It causes there to be more exports than there would otherwise be, he said.
The U.S. aluminum extrusion industry has benefited from trade action against extrusions made in China, DeFrancesco said, pointing to increased market share for domestic extruders. The Chinese extruders have primarily left the market since the (duty) orders went into effect, he said.
The U.S. International Trade Commission ruled in 2011 that dumped and subsidized imports of aluminum extrusions from China were injuring the domestic industry (amm.com, April 28, 2011).