China Can But Won't Nip Aluminum Overcapacity

HONG KONG, Oct. 28 -- China is capable of quickly eradicating its metal overcapacity, especially in aluminum, but it will not, for the sake of social stability, said Johnson Chan, OCBC's head of structured finance for North Asia.

    The restarting of idle capacity in China, particularly of aluminum, threatens to undermine metal price recoveries, and China can easily nip this in the bud by introducing stringent requirements to restarting, said Chan, who is also vice-chairman of the Hong Kong Energy and Minerals United Assns.

    "But such [a] sudden policy will lead to massive job losses and concerns about social stability… If they want to stop overcapacity, it is very easy. But they cannot," Chan told MB on the sidelines of the 7th Asian Aluminum Conference in Hong Kong.

    Conference delegates agreed that China's idle capacity is likely to keep price gains capped in the short term, despite low market inventories.

    "In the first half of the year, due to arbitrage, there were big imports of aluminum into China and so the aluminum price rose very quickly… But you can see, once prices increased, there are lots of [capacity] restarts, and given that China has much idle capacity, there is no chance of seeing much upside to aluminum prices in the short term," said Liu Xiangyu, trading department manager at Chalco Hong Kong Ltd.

    "Around 2 million tpy of idle aluminum capacity can make profits at current price levels so that much is what we could see coming on very soon," estimated Gayle Berry, vice-president of commodities research at Barclays Capital.

    Social stability is also the reason that China is moving steadily but slowly towards greater environmental standards in its metals industries, particularly with the energy-guzzling aluminum sector, said Chan.

    With time, there is no doubt that China's cost competitiveness will come down as a result, he said.

    So, global economies should stop their efforts to increase protectionism aimed at China, he added.

    "Now if all countries are looking to protectionism for themselves but are also looking on China's stimulus of the local economy to save the world… once China's economy has been damaged, the outcome is a lose-lose situation," he warned.

    Responding to MB's questions about the debate in Europe over whether to reduce aluminum import taxes, Chan said: "I don't know what the European government wants to do but I'm guessing they want to protect their own industries. That's why there should be more voices against protectionism. The whole world should work together."

    Possibly the greatest stumbling block to China's continued consumption is the "high possibility" of stagflation in the US, said Chan.

    "When the US government gives out the money, it should be slow, otherwise stimulus could lead to deflation… the effect on China would be very big. Chinese consumers have a lot of savings and if the US goes into stagflation, their sentiment will be depressed and their spending will stop and then the rest of the world will see that even China has stopped spending and the effect on the rest of the world will follow," he told MB.

    "When you think deeply, can China rely on domestic demand and get 8%, 9% [GDP growth] every year? That's not possible."

    (Source: Metal Bulletin)