Aluminum Industry in China (Market Report 2003)

CHINA IN THE GLOBAL ALUMINIUM PRODUCTION SYSTEM
ABSTRACT
The paucity and opacity of data on China disseminated into the public domain
perpetuate a longstanding asymmetry of information that no doubt works to the
detriment of the Western World aluminium industry in its commercial dealings
with China. This study seeks to contribute to stripping away the veil of opacity
and to rank China in the global aluminium production system. This is attempted
by evaluating China’s rank from the demand side as well as from the supply
side, using a set of generally accepted industry benchmarks. While previous
studies appear to accord insufficient prominence to aluminium scrap recycling,
this study treats it as an industry fundamental in its own right. Three key drivers
of industry competition are accentuated, notably reserves/access to reserves,
technological progressiveness and energy generation. These in turn have elicited
a set of strategic responses and it is on this basis that China is assessed and
ranked. The study finds that China’s reserves are comparatively thin but that in
spite of this the country has carved out commanding positions within the global
alumina and primary aluminium production systems. It is, however, a relative
minnow in the global scrap recycling system. Importantly, the study also finds
that despite its apparent dominant position in alumina and primary aluminium,
China lags other leading competitors in technological progressiveness and
responsiveness to the industry imperative of orchestrating a coherent and
extensive raw materials sourcing strategy. Finally, by harnessing the Yangtze,
China is poised to expand its already considerable energy generation capacity.
INTRODUCTION
A country’s place in the Global Aluminium Production System (GAPS), to our way of
thinking, is most appropriately determined by a set of generally accepted industry
fundamentals. In particular, the key fundamentals are its reserves base/reserves,
consumption and production dynamics, technological progressiveness, energy self-
generation, stocks and scrap recycling. This study seeks to locate China in the global
aluminium production system from the demand side as well as from the supply side. On
the demand side, we examine China’s economic viability as a critical underpinning of its
consumption of alumina and aluminium. On the supply side, we evaluate its mineral
resource endowments, measured largely by the magnitude of its bauxite reserves
coupled with its production of bauxite, alumina and aluminium. China’s alumina stock
management together with its energy generation and recycling of scrap aluminium also
feature in our supply side analysis. The study is organized into three (3) sections. Section
I looks at the factors influencing China’s economic viability, most notably its appeal to
foreign investors. Section II casts an analytical eye on its bauxite endowments as well as
its energy self-generation performance as a foundation for assessing its rank in the global
aluminium production system. Section III explores the implications of developments in
China for the Jamaican bauxite and alumina industry.
Copyright © 2003 by
Philip S. Baker. All rights reserved.
1

Table 1. CHINA’S SHARE OF WORLD PRODUCTION OF KEY LME METALS
(2002: METRIC TONNES)
China World China’s Share (%)
Copper 1,559,000 15,011,000 10.4
Lead 1,320,000 6,597,000 20
Tin 88,000 273,000 32
Nickel 53,000 1,175,000 4.5
Zinc 2,106,000 9,618,000 21.9
Total 5,126,000 32,674,000 15.7
Source: LME and Author’s calculation.
Comparatively Low Business Transaction Costs
Taking compensation for persons employed in urban enterprises as an indicator of
business transaction costs, it can be demonstrated that such costs in China are
comparatively low. For example, data from the Chinese National Bureau of Statistics and
the US Department of Labour show that in 2001 the average cost of employing a Chinese
worker in manufacturing for 3 months was 6,221 yuan (US$749.52) compared to
US$3,883.207
in South Korea, US$6,2648
in Australia and US$9,753.609
in the US.
Steadily Improving Technological Progressiveness
Increased exposure to international competition forced China to take stock of the wide
technological gap that existed between itself and other industrialized countries, notably
Japan and the US. This has translated into a growing urgency to enhance technological
progressiveness as a route to creating new competitive industries, rehabilitating its
creaking infrastructure and improving international industrial competitiveness. As a
consequence, this goal has been embodied in an array of five year plans, more
specifically the State Plan for Solving Key Scientific and Technological Problems (1983
during the 6th
five year plan), the State Plan for Key Industrial Experiments (1984) and
the Key State Projects for Technical Development (1992). Aided by a solid and steady
stream of FDI, signs have long begun emerging of China’s growing technological
progressiveness and nowhere is this more discernible than in the electronics industry
where data from the UN Statistics Division demonstrate that exports of diodes, transistors
and semi-conductors have climbed from US$677.5 million in 1997 to roughly US$1.4
billion in 2001.
7
Computed using 2001 hourly compensation costs of US$8.09 over 3 months at 160 hours per month.
Hourly compensation costs were obtained from the US Bureau of Labor Statistics.
8
Hourly compensation costs were US$13.15.
9
Calculated at the hourly rate of US$20.32.
4
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Successful bid to host the 2008 Olympic Games
China’s successful bid to host the 2008 Olympic Games in Beijing is fast underpinning
the recovery of the World’s raw materials, metals and capital goods markets, evidenced
by its positioning to implement its Five Year Plan, including the renewal of its somewhat
decrepit infrastructure. Indications are that this will involve the erection of over twenty
(20) stadia (stadiums), the retrofitting of over a dozen (12) existing sporting facilities,
building a new Olympic village as well as substantial upgrading of transport networks
such as bridges, railways and airports. To this end, it is demonstrated by the data in Table
3 that China’s share of the World’s consumption of copper, lead, tin, nickel and zinc was
a shade over 16% in 2002. However, in the run up to Beijing 2008 a major geopolitical
slip15
paralleling the former Soviet Union’s march into Afghanistan in 1979 or an
authoritarian clampdown on civil liberties at home could gravely imperil the anticipated
welfare gains from hosting the Games as was the case with Moscow 1980.
Table 3. CHINA’S SHARE OF WORLD CONSUMPTION OF KEY LME METALS
(2002: METRIC TONNES)
China World China’s Share (%)
Copper 2,562,000 14,875,000 17.2
Lead 862,000 6,474,000 13.3
Tin 59,000 280,000 21.1
Nickel 91,000 1,166,000 7.8
Zinc 1,620,000 9,175,000 17.7
Total 5,194,000 31,970,000 16.3
Source: LME and Author’s calculation.
CONSUMPTION
We now extend our demand side investigation by taking a microscopic look at China’s
consumption of metallurgical grade alumina and primary aluminium. The focus of
analysis is per capita consumption and, in the case of alumina, the sample consists of
Australia, Brazil, Canada, China, Norway and Russia. Based on the latest available data
from James F. King, in 2002 these countries consumed approximately 33.9 million metric
tonnes of alumina or roughly 67% of the world total of 50.9 million. With regard to
primary aluminium, we try to gauge how China stacks up against the US, Canada, Japan,
Germany and Russia. Sample countries accounted for more than 13.6 million metric
tonnes or over 54% of the 25.1 million metric tonnes of world aluminium consumption in
2002.
15
It should be noted that Taiwan and Tibet remain geopolitical irritants for China.
7

The harnessing of the Yangtze River that is currently taking place under the Three
Gorges Project coupled with the hosting of the 2008 Olympics lend added credence to
this prospect.
II. BAUXITE ENDOWMENTS AND ENERGY SELF-GENERATION
We now shift the focus of the analysis to the supply side, involving, in the main, an
evaluation of China’s bauxite endowments - the essence of its production of alumina. In
addition, we examine the country’s energy self-generation performance as it relates to the
production of primary aluminium.
BAUXITE ENDOWMENTS
In attempting to quantify China’s bauxite endowments (and those of any other country,
for that matter), we sound a note of caution, recognizing that this information is typically
veiled in uncertainty. Not surprisingly, one encounters a diversity of reserves estimates
for China in the literature from time to time. For instance, Pui-Kwan Tse (2001) argues
that the inland Provinces of China are the repository for roughly 85% of the country’s
untapped (and very likely, unrecorded)18
mineral resources and that it is the poor
transport links between coastal and inland Provinces that presently militate against their
commercial exploitation. Notwithstanding the implications of this assertion, we can
report that the January 2003 issue of Mineral Commodity Summaries published by the
US Geological Survey shows China’s reserves base and reserves19
in 2001 as being 2.3
billion metric tonnes and 0.7 billion metric tonnes, respectively. Drawing on this data
source, Table 6 demonstrates that China’s endowments compare to a reserves base of 8.7
billion tonnes and reserves of 4.4 billion for Australia and 8.6 billion and 7.4 billion,
respectively, in the case of Guinea. With the World’s bauxite reserves base and reserves
variously estimated at 75 billion and 55 billion tonnes, respectively, China’s share works
out at 3.1% and 1.3%. This, therefore, for reasons given earlier, is at best an
approximation of China’s place in the GAPS in terms of the magnitude of its bauxite
reserves base and reserves.
18
Author’s comment.
19
The reserves base encompasses ore that is economic, marginally economic or uneconomic in terms of its
recoverability. Reserves are that portion of the reserves base that can presently be extracted
economically.
10

Furthermore, for the purposes of this study we assume that there have been no new
discoveries of ore since 2001- the year for which official data are available. The analysis
is based on a sample, comprising Australia, Brazil, China, Guinea, India, Jamaica and
Russia given the fact that in 2002 these players accounted for 119.9 million metric tonnes
of bauxite produced or 85% of the world total of 141 million metric tonnes.
Bauxite
Notwithstanding the constraints that the opacity of China’s official statistics places on our
analysis, it can be inferred from Table 8 that that country has in recent years been on a
trajectory of very intensive bauxite reserves utilization. This is further illustrated by a
consistent breaching of the limits of its installed capacity (Table 9). In particular, by
ramping up its production to reserves ratio to an average of over 1.9%, China has
leapfrogged Russia and India to become the world’s fifth largest producer behind
Australia, Guinea, Brazil and Jamaica. This is despite having a much lower level of
reserves than India, thus bringing into very sharp focus the distinct possibility of China
having to rely increasingly on imported bauxite to satisfy its continuously growing
demand for alumina. This is assuming of course that economically recoverable ore of a
considerable quantity cannot be salvaged from the hitherto untapped mineral resources
languishing in the bowels of the inland Provinces to which reference is made in Pui-
Kwan Tse (2001).
Table 8. PRODUCTION AS A SHARE OF RESERVES
PRODUCTION
(Million metric tonnes)
RESERVES
SHARE
(%)
2001 2002 2003* 2001 2002** 2003** 2001 2002 2003*
AUSTRALIA 53.3 55.0 60.9 4,400 4,342 4,283 1.2 1.3 1.4
BRAZIL 13.9 13.2 15.7 1,800 1,784 1,768 0.8 0.7 0.9
CHINA 9.5 10.0 19.1 700 683 664 1.4 1.5 2.9
GUINEA 15.7 16.0 18.7 7,400 7,383 7,364 0.2 0.2 0.3
INDIA 8.4 9.0 10.6 770 760 749 1.1 1.2 1.4
JAMAICA 12.4 13.2 13.8 2,000 1,985 1,978 0.6 0.7 0.7
RUSSIA 4.0 3.7 4.5 200 195 190 2.0 1.9 2.4
* Estimated by James F. King.
** Assuming there are no new discoveries.
Source: US Geological Survey, Author’s computation.
13

That said, as will be discussed later, the market still has a surfeit of stocks to work off and
this has undoubtedly prompted several producers, notably those in the US and Canada to
curtail production at some of their facilities. For instance, in 2002, Alcoa temporarily
halted production at Badin, North Carolina and de-commissioned its Troutdale, Oregon
smelter. Indeed, the market has been so soft that the company presently has
approximately 11.4% of its global primary aluminium smelting capacity of just below 4.0
million metric tonnes lying dormant. Market dynamics, however, have so far not
constrained the Chinese, as their production to capacity ratio rose by a respectable 8% in
2002 over 2001.
Table 11. PRODUCTION AS A SHARE OF NAMEPLATE CAPACITY
PRODUCTION
NAMEPLATE
CAPACITY
SHARE
(%)
2001 2002 2003* 2001 2002 2003* 2001 2002 2003*
AUSTRALIA 1.8 1.8 1.8 1.8 1.8 1.8 100.0 100.0 100.0
CANADA 2.6 2.7 2.3 2.7 2.8 2.8 96.3 96.4 82.1
CHINA 3.5 4.4 4.4 4.3 5.0 5.0 81.4 88.0 88.0
RUSSIA 3.3 3.4 3.4 3.3 3.4 3.4 100.0 100.0 100.0
USA 2.6 2.7 2.3 4.4 4.2 4.2 59.1 64.3 54.8
At the end of September and reflecting the fact that the market is still in over-supply. As such,
many expansion plans have been deferred to 2004 and beyond.
Source: Aluminium Association of Canada, US Geological Survey, CRU, Author’s calculation.
16

More generally, what remains lacking is a coherent and efficient multi-sourcing strategy,
incorporating equity investments overseas, a robust stock management system and
leading edge scrap metal recycling. China might wish to leverage its generous energy
endowments in fashioning this strategy.
.
STOCK MANAGEMENT
Alumina
Tightness in the global alumina market29
, a pattern of robust growth in its own per capita
consumption and a high domestic production to capacity ratio provide the context in
which to assess China’s alumina stock management strategy. As a consequence, alumina
stock levels have gyrated between periods of net replenishment (over 0.35 million metric
tonnes in the 3rd
Quarter of 2001) and sizeable de-stocking (approximately 0.15 million
tonnes in the 1st
Quarter of 2003)30
. As the data in Table 11 above demonstrate, the stock
draw down during this period is substantiated by an 8% increase in the country’s
production to capacity ratio for aluminium. This in turn is fuelled by ongoing rapid
industrialization and high levels of overall economic growth on the back of massive FDI
inflows.
The decision to de-stock (as against making spot purchases) reflects two important
nuances, notably steadily rising alumina prices coupled with meager growth in the world
economy. This was accompanied by a supply overhang for primary aluminium
demonstrated by stocks31
climbing from approximately 4.4 million metric tonnes in the
4th
Quarter of 2001 to about 4.97 million (or about 12 weeks) in the 3rd
Quarter of 200332
.
The certain knowledge that the market still had a significant volume of metal to digest no
doubt elicited sobriety on the part of the Chinese. At the risk of generalizing, this episode
does indicate that the Chinese can rise to the challenge of exhibiting the market discipline
necessary in orchestrating a flexible and cost-effective stock management system. This
does indeed help to allay fears that insufficient regard for market forces together with
inconsistent and unpredictable purchasing practices on the part of the Chinese could
worsen price volatility and ultimately plunge the GAPS into terminal over-supply.
29
Vividly illustrated by the rise in Caribbean metallurgical grade alumina prices from US$138 per metric
tonne in the 1st
Quarter of 2002 to US$280 per tonne at the beginning of the 4th
Quarter of 2003.
30
See CRU Monitor (Alumina), April 2003.
31
Adjusted for aluminium stocks used as collateral in financing deals and, as such, are held off-warrant.
32
See CRU Monitor (Aluminium), October 2003.
19

Figure 1. TAXONOMY OF COMPETITIVE IMPULSES
I. INDUSTRY DYNAMICS:
II. DRVERS OF COMPETITION
III.GENERIC STRATEGIC RESPONSES
* Focus appears to be largely on fossil fuels.
** Homogenizing furnaces and cooling chambers.
Reserves/Access to
reserves.
Energy
Generation.
Technological
Progressiveness.
Coherent multi-
sourcing.
Low-cost, renewable
energy.
Transition from
Soderberg to Prebake to
AP30 and AP50.
LEADERS:
CANADA (Carbon and
electrolytic cell control)
USA (Inert anode)
NORWAY (HAL250;
Remelting**)
LAGGARDS:
RUSSIA
CHINA
INDIA
LEADERS:
CANADA
NORWAY
CHINA
RUSSIA
LAGGARDS:
USA*
INDIA
LEADERS:
USA (Jamaica, Brazil, Guinea, Australia, etc)
CANADA (Australia, Brazil, Guinea, Ghana)
NORWAY (Jamaica, Brazil, Guinea, India)
RUSSIA (Guinea)
LAGGARDS:
CHINA
INDIA
Greater industry
Consolidation.
Promotion
of
economies
of scale
and scope.
Tighter
management
of cost
structure.
Modest growth and
periods of over-
supply.
Industry
slips
deeper into
mature phase
of its life cycle.
22

Economic Miracle Fizzles
If for geopolitical or other reasons39
the Chinese juggernaut runs out of steam, this could
severely constrain that country’s ability to absorb its current share of Western World net
exports, thereby pushing the GAPS more into over-supply than it already is. However,
the consequential market softness might be short-lived particularly if non-Asia-driven
growth in North America picks up momentum40
in the present disinflationary and low
cost of capital environment. Thus any attendant downside impact would possibly be
mitigated, resulting in less of a need to rationalize production in North American plants
to which Jamaican production is shipped. This does not, however, rule out the likelihood
of a rebalancing of third party sales from which there could be some adverse implications
for the domestic industry. This is especially in light of the fact that in such a situation the
market requirement of more disciplined cost management could mean that Jamaica’s
higher-cost production base comes under increased pressure not dissimilar to that which
spawned the move towards more flexible and cost-effective work practices in the local
industry in 1998.
Economic Collapse Precipitated by Social Instability
A collapse of the Chinese economy under the weight of social instability followed by a
clampdown on civil liberties by the leadership would result in far more devastating
knock-on effects on the GAPS in general and the domestic industry in particular than
those emanating from Russia’s market-destabilizing behaviour leading to the signing of
the industry Memorandum of Understanding of 1994. This is explained by the magnitude
of the Chinese economy and its greater degree of integration into the international
division of labour. In this event, there would inevitably be a more vigorous quest than at
present to generate cost savings for sheer survival, necessitating a culling of facilities
with uncompetitive cost structures. To this the domestic industry would be hugely
exposed and considerably vulnerable.
On the whole, the implications of China’s place in the GAPS range from fortuitous under
scenario I to awkward under scenario II and chilling under scenario III. In all of this, a
variable that must never be ignored is the dexterity (or the lack thereof) with which the
Chinese leadership handles that bubbling cauldron of discontent (700 million strong)
currently languishing in its inland Provinces. Such discontent could be fanned by possible
job losses flowing from future reform of the state-owned enterprise and agricultural
sectors as well as rehabilitation of the banking sector, said to be swimming in a rising
pool of non-performing loans. Jamaica should be prepared for each of the three (3)
scenarios.
39
A stoking of tensions by China over Taiwan or in the Korean peninsula are realistic examples.
40
Influenced quite possibly by the America-led multi-billion dollar Iraqi reconstruction effort.
25

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