China now has almost one million tons of unnecessary aluminum and cannot stop producing it

China has too much of this stuff
China has too much of this stuff
Image: Getty Images / Feng Li
We may earn a commission from links on this page.

China’s aluminum stockpiles are the highest in two years.

The nation’s property developers and car makers need less of the stuff, but production is soaring anyway.

Almost a million tons of unnecessary aluminum has piled up in warehouses. And the glut is likely to keep building. Provincial governments in China often turn to aluminum production to keep people in jobs. This has little to do with commercial demand. Aluminum smelters are huge employers, requiring armies of workers to build and then operate them. Officials tend to encourage the building of new smelters by offering subsidized power contracts and favorable tax treatments.

“This is all part of the wider financial stimulus that is ongoing in China as governments move to protect industry from the economic slowdown” says Patrick Chovanec, associate professor at the school of management and finance at Tsinghua University, Beijing.

In China, there is something political about aluminum. To keep people in jobs, governments raise production when the economy slows. China’s aluminum industry is run along Russian Soviet-era lines.

China accounted for 119 of the 133 aluminum smelters built globally between 1985 and 2005, according to the London Metal Exchange.

China-based aluminum consultancy AZ China said in a June report that 25% of the nation’s output of the metal is state subsidised.

New smelters usually defy commercial reality. Last year, the province of Xinjiang in China’s far northwest invested $13.6 billion in new aluminum capacity. China’s industry regulator the National Development and Reform Commission has told the province to stop.

But as Paul Adkins of AZ China said in an October 21 blog post about his recent visit to one of Xinjiang’s aluminum smelter construction sites, “the reality is that the expansion program in Xinjiang is set to continue.”

He questioned the practicalities of Xinjiang’s projects, noting that the main source of demand for aluminum in China is in Guangxi and Guangdong provinces in the southeast, meaning finished metals will be sent along “about the longest diagonal line,” away from Xinjiang. He noted, however, that Xinjiang’s producers believe they can still make a profit from government power subsidies.

Reuters also writes today: ”Production in the southwestern province of Guizhou, the seventh-largest aluminium producer in China, may also rise, as the provincial government is helping cut power costs. Sources at smelters said the Guizhou government was letting local aluminum smelters build direct transmission lines and set prices with nearby power generation plants in a move that could cut smelters’ production costs by about 7% to 8%.”

The bendy metal is already becoming a flashpoint in China’s relations with almost every other major world power. 

In good times, China gobbles up most of the aluminum it produces. But it may start dumping state-subsidised product on world markets,  hurting international competitors.

As Bloomberg has noted, the increased inventories of aluminum  ”may force smelters around the world to cut output further.”

In 2010, the Obama Administration ruled Chinese aluminum suppliers were dumping state-subsidized product on the US market and putting American producers out of business. The EU is looking into a similar case. And Australia’s customs authority ruled earlier this year that Beijing government-backed Chinese miner Chalco was dumping there too, though Chalco is appealing the ruling.

The likes of Alcoa, which reported lackluster third-quarter results, or Norway’s Norsk Hydro, which is now money-losing and has been closing plants, have not blamed the Chinese government for their recent struggles. After all, they each rely on Chinese companies, many of which are state-owned, to buy products their aluminum is used to make, from soda cans to trucks. But it is possible that the world’s aluminum majors have lobbied governments to take these anti-dumping stances.

If China cannot dump its excess product, stockpiles will get bigger. 

If the EC and Australia move further to restrict Chinese aluminum imports, expect the warehouse stockpiles to get even larger. As an aluminum industry representative told Bloomberg:

“Unless there are huge stimulus policies coming after the party congress in November, inventories will rise to a new record.” The biggest stockpile ever recorded in China was 1.2 billion tons in May 2010.